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110
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D O M E ST IC AFFAIRS STU D IES

Am42

CONTROLS
AND INFLATION

1975

The Economic Stabilization
Program in Retrospect

Marvin H. Kosters

In association with J. Dawson Ahalt
Foreword by George P. Shultz

THE AMERICAN ENTERPRISE INSTITUTE FOR PUBLIC POLICY RESEARCH,
established in 1943, is a publicly supported, nonpartisan research and educational
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troversial issues.
ADVISORY BOARD
Paul W. McCracken, Chairman, Edmund Ezra Day University Professor of Business
Administration, University of Michigan
R. H. Coase, Professor of Economics, University of Chicago
Milton Friedman, Patd S. Russell Distinguished Service Professor of Economics,
University of Chicago
Gottfried Haberler, Resident Scholar, American Enterprise Institute for Public Policy
Research
C. Lowell Harriss, Professor of Econo?nics, Columbia University
George Lenczowski, Professor of Political Science, University of California, Berkeley
Robert A. Nisbet, Albert Schweitzer Professor of the Humanities, Columbia University
James A. Robinson, President, University of West Florida
EXECUTIVE COMMITTEE
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Policy Studies
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and Development

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Studies
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and Defense Policy Studies
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the President for Communciation

CONTROLS
AND INFLATION

CONTROLS
AND INFLATION
The Economic Stabilization
Program in Retrospect
Marvin H. Kosters
In association with J. Dawson Ahalt
Foreword by George P. Shultz

American Enterprise Institute for Public Policy Research
^
Washington, D. C.

Marvin H. Kosters is a resident scholar at the American Enterprise
Institute and former associate director for economic policy of the Cost
of Living Council.
J. Dawson Ahalt is staff economist, Office of the Secretary, U.S. De
partment of Agriculture, and former deputy associate director for
economic policy of the Cost of Living Council.

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ISBN 0-8447-3177-3
Domestic Affairs Study 37, December 1975
Library of Congress Catalog Card No. 75-34688
©1975 by American Enterprise Institute for Public Policy Research,
0T*‘ • Permission to quote from or to reproduce materials in
this publication is granted when due acknowledgment is made.
Printed in the United States of America

CONTENTS

ACKNOW LEDGM ENTS
FOREWORD

INTRODUCTION

BACKGRO UND

The Political Context 4
Economic Conditions in Mid-1971

THE NEW ECONOM IC POLICY

Structure of the Controls 15
Phase II 18
The Shift to Phase III 21
Freeze II and Phase IV 25

CO N TRO LS AND THE ECONOMY
General Performance of the Economy
W ages 33
Prices 37
Profits 47
Profit Margin Limitations 55

29
29

SECTORAL DEVELOPMENTS

Food 61
Lumber 79
Petroleum Prices 81
Cattle Hides 84
Fertilizer 85
Other Sectors 89

5 CONTROLS AND EFFICIENCY
Symptoms of Inefficiency 92
Cost Pass-Through and Product Mix
Shortages 96
Business Practices 98

91
95

101

CONTROLS AND RELATED POLICY ISSUES
Controls and Demand Management 102
Controls and Other Stabilization Policy Initiatives
Controls and the Public 107
Limitations of Controls 109

7 SUMMARY AND CONCLUSIONS
APPENDIX

104

113
119

LIST OF TABLES
1. Average Hourly Earnings Increases for Selected Industries
Covered by Long-Term Collective Bargaining Agreements
and Wage Increases under Collective Bargaining Agreements
in Manufacturing 9
2. Regulations of the Controls Program, Phases II, III, and
IV 16
3. Employment and Production Changes in the U.S. Economy,
1969-73, and Average for Preceding Decade 30

4. Average Hourly Earnings before and after Adjustments for
Consumer Price Increases and Output per Man-Hour, Pri
vate Nonfarm and Manufacturing Sectors 31
5. Profits and Income Shares for the Corporate Sector and
Nonfinancial Corporations 32
6. Capacity Utilization Rates 34
7. Average Hourly Earnings Changes, Selected Industries with
a High Proportion of Workers Covered by Long-Term Con
tracts Expiring in 1973 35
8. First-Year Wage Rate Changes in Collective Bargaining
Agreements Covering 1,000 Workers or More 38
9. Consumer Prices and Wholesale Prices by Phases of the
Stabilization Program: Percent Changes for Selected Com
ponents 40
10. Wholesale Prices of Industrial Products below Initial Price
Ceilings: Number of Items and Percentage Impact for
Selected Months, December 1971 through April 1973 43
11. Profits and Profit Margins for Nonfinancial Corporations:
Quarterly and Cumulative Changes from 1971-1 through
1974—11 48
12. Output per Man-Hour Changes and Profit Margins for
Nonfinancial Corporations: Quarterly and Cumulative
Changes from 1971-1 through 1974-11 51
13. Prices and Their Relation to Profits and Output per ManHour Changes for Nonfinancial Corporations: Quarterly and
Cumulative Increments from 1971-1 through 1974-11 54
14. Relation of Profits before Taxes to Sales, All Manufacturing
Corporations, by Industry Group, 1968-74 56
15. Total World Grain Supply-Distribution, Marketing Years
1960-61 through 1974-76 64
16. Disposable Income per Capita in the United States: Quar
terly and Annual Percentage Changes in Current and Con
stant Dollars, 1971-74 66
17. Ratios of Livestock Prices to Corn Prices: Selected Years,
1967-73 66
18. Movements in Market Basket Statistics before and during
Economic Stabilization Program 78
19. Prices of Corn, Wheat, and Anhydrous Ammonia Fertilizer,
1970-74 88
20. Comparison of Domestic (U.S.) and Export Prices of Granu
lar Triple Superphosphate and Diammonium Phosphate 88
A -l through A - l l : See Appendix, p. 119.

LIST OF FIGURES
1. Wage Increases under Major Collective Bargaining Agree
ments 12
2. Changes in Productivity, Compensation, and Unit Labor
Costs in the Private Nonfarm Economy, 1960-71 13
3. Changes in Prices, Labor Costs, and Profits for Nonfinancial
Corporations, 1960-71 14
4. Changes in Prices and Unit Labor Costs for Nonfinancial
Corporations, Predicted and Actual, 1959-73 45
5. Changes in Prices and Unit Labor Costs in the Private Non
farm Sector, Predicted and Actual, 1950-73 46
6. Slaughter Rates for Cattle and Hogs, 1972 and 1973 71
7. Prices for Cattle and Hogs, 1972 and 1973 72
8. Index of Relative Wholesale Prices of Softwood Lumber and
Levels of New Private Housing Starts, 1958-74 82
9. Corn Yield Response to Nitrogen Applications 86
A -l through A-3: See Appendix, p. 119.

ACKNOWLEDGMENTS

This review of the Economic Stabilization Program was prepared
while the principal author was a resident scholar at the American
Enterprise Institute for Public Policy Research. It draws heavily on
the files of the Cost of Living Council and on files put together while
I was associate director for economic policy and planning during
almost the entire period of the stabilization program. J. Dawson
Ahalt, who was deputy associate director for economic policy, pre
pared the initial draft of the food, lumber, fertilizer and hides sections
of the paper while he was staff economist, agricultural economics,
Office of the Secretary, U.S. Department of Agriculture. While overall
responsibility for the study is mine, Dawson Ahalt made important
contributions to the entire manuscript.
This review was initially presented at the Conference on Research
in Income and Wealth on 'Trice Behavior, 1965-1974," sponsored by
the National Bureau of Economic Research, held 21 through 23 No
vember 1974 in Bethesda, Maryland. The paper is also scheduled to
be published later by the National Bureau of Economic Research along
with the related papers in a volume containing the proceedings of the
conference. We gratefully acknowledge the special permission granted
by the National Bureau of Economic Research for publication of this
paper at this time.
We also gratefully acknowledge the support for the preparation
of the paper by the National Science Foundation under grant num
ber GS-43757, the Ford Foundation under grant number 740-0510,
and the American Enterprise Institute for Public Policy Research.
The views expressed in this study are those of the authors and
do not necessarily reflect the views of the organizations that con

tributed to the support of the research or with which the authors
are affiliated.
Many helpful comments and discussions contributed materially
to improving the study. Those whose assistance is acknowledged
include John Dunlop, Kenneth Fedor, Joseph Burns, Yale Brozen, Dan
Larkins, and Robert Aaron Gordon (who summarized and criticized
the paper presented at the National Bureau of Economic Research
conference). Janet Bollen assisted in obtaining data and was respon
sible for checking many of the computations and sources. I am also
indebted to Phyllis Luther who typed successive drafts of the paper
and who also assembled, organized, and drew upon my files, both at
the Cost of Living Council and at the American Enterprise Institute,
with diligence, competence, and consistent good humor.
Finally, I am indebted to my wife, Bonnie, and three children for
their willingness to tolerate my long hours at work while I was at the
Cost of Living Council and while the paper was being prepared.

FOREWORD

Those readers interested in a quick summary of this useful perspec
tive on the relationship of controls and inflation can turn to the final
chapter. Those who are really in a hurry, however, may just refer to
Table 9. Here can be seen the movement in the price indexes from
a time two-and-one-half years preceding the Economic Stabilization
Program through the eight months following its demise. Its nineteen
rows constitute the components of the price indexes, while its nine
columns divide the total period into natural time segments.
At a glance one can see the overall trends, including the fact that
only in one of the two short freeze periods was the increase in con
sumer prices less than the increase during the eight months of 1971
prior to the freeze. Great variability among sectors of the economy is
evident throughout the entire period of the Economic Stabilization
Program. Nowhere is this variability greater than during Phase III,
where it can be seen that influences outside the scope of the program
led to a rate of increase in prices which in turn undermined confidence
in the program. Food and energy prices, essentially internationally
traded commodities not subject to controls, increased by 20 percent
and 18 percent, respectively, while nonfood commodities and services
increased by 4.6 percent and 4.3 percent, respectively. Five or ten
minutes spent scanning down the columns and across the rows of this
table will yield other insights to the reader and suggest questions,
many of which are dealt with in the text.
Several themes woven through this volume stand out in my
mind and should be useful both to the analyst of this period of our
economic history and to anyone considering installing and adminis
tering a controls program in the future.

The first theme is the virtual inevitability of stages during any
lengthy controls program, despite the fact that the underlying ap
proach of the program may remain almost the same. Thus, the
changing administrative structure of the Economic Stabilization Pro
gram was built upon a relatively constant set of concepts involving
such things as the pass-through of costs, with adaptations of dollarfor-dollar and percentage approaches, profit-margin comparisons with
various base periods, industry and size-of-firm approaches to cover
age, various averaging techniques for judging price changes, and
so on.
Much more visible to the public and to those subjected to the
controls mechanisms were the various administrative phases of the
program. The shift from one phase to another has, in retrospect,
received a fair amount of criticism as reflecting a kind of adminis
trative uncertainty about the whole process. But, the perspective
in this study suggests the inevitability of changes in administrative
structure. This is particularly true when controls are seen as a tem
porary phenomenon but would be true as well if "phase out" were
not the ultimate goal. Even a cursory study of experience with
controls during World War II or the Korean War bears this point out.
The dynamics of the initial freeze demanded a comprehensive
follow-on structure. This structure was inevitably modified both in
formal administrative setup and in the extent of self-administration
in the whole process.
To a degree this "phasing" was going on virtually all the time,
with only the more dramatic changes singled out for explicit labeling.
In any case, whatever the consistency of the program's underlying
concepts, the evolution of the administrative structure will preoccupy
those in charge of managing the controls.
A second and related point is the interplay between changing
structural relationships in the economy and developments in the
controls program itself. In part, this is a question of the force of
traditional relationships which, when not in balance, assert them
selves. The authors' analysis of the wage side of the program brings
this point out clearly, as they trace through the implications of
imbalances in wage relationships (Art Ross's "coercive comparisons")
for permissible increases in particular cases. But, in general, the seeds
of the problems that must be faced in the controls program, or for
that matter in economic developments without a controls program,
can usually be found in the history of the immediate past. At the
same time, the controls program itself is the prisoner of a vast array of
links among parts of the economy. Thus, price changes for fertilizer

cannot be considered without also considering what is to be done
about explosives, because common raw materials are used. Indeed,
a controls program forcefully demonstrates the high degree to which
our economy is a closely interrelated and interdependent system.
A third idea which is found in many parts of this study is the
link between domestic and international markets and the implica
tions of that link for the administration of any controls program.
While we know in our minds that the American economy is closely
related to the world economy, we realize in our gut the force of that
point as a result of observing the controls program in action. At the
outset, price increases for imported articles were accepted, since not to
accept them would deny us access to the world market. But, as the
program progressed, the implications of our having domestic prices
that were lower than world prices for internationally traded com
modities became more and more apparent. If world prices were not
to be accepted, then controls on prices would inevitably become
controls on international trade, specifically in the form of quantitative
limitations on exports. In turn, the administrative, let alone the policy,
implications of allocating goods to other countries on some basis other
than the price system are chilling to contemplate. As an aside, it is
worth noting that this procedure operates in reverse. With all the
current discussions about commodity agreements of one kind or
another, it is well to remember that international controls will as
surely lead to domestic controls as domestic controls were leading
to international controls.
Phase III gave self-administration a bad name, but undeservedly
so. The authors bring out the fact that self-administration worked,
in the sense that the sectors of the economy covered by it pretty well
conformed to the rules set out for them. What upset the apple cart,
as is now generally recognized, was a worldwide surge of inflation
beyond the reach of the domestic controls program. This point is
particularly worth emphasizing, since large elements of self-adminis
tration will be necessary should controls again be imposed. Otherwise,
even a large administrative apparatus would be swamped.
One final point brought out in this manuscript but too often over
looked: controls almost inevitably have a major impact on other
central economic policies, sometimes for good, but sometimes for ill
of major proportions.
On the good side, the problems of controls stimulated an inten
sive and, one hopes, continuing examination of government policies
that contribute to inflation. Administratively, those charged with
concern over inflation were given new and powerful leverage against

pernicious policies promoted through government by powerful but
segmented interests. Thus, excessive set-asides in planting, com
pulsory empty backhauls, restricted carloading of certain commodities,
or size standards for produce designed to curtail supply, and a myriad
of such other things were brought into discussion, and, in many cases,
important changes were made. This effort to demand an ''inflation
impact statement/' implicit or explicit, yielded important results
during the controls period and holds the prospect for positive con
tributions to public policy with or without an economic stabilization
program. It would be highly worthwhile for this effort to be insti
tutionalized on a continuing basis.
On the bad side are the inevitable consequences of controls
for government policy toward aggregate demand. The frequently
heard argument that "needed" fiscal and monetary stimulation will
be possible if there is an "adequate incomes policy" is proof enough
of the most pernicious aspect of controls. It suggests why controls
or any reasonably formal incomes policy are likely to lead to more
inflation and not to less. It gives the body politic the illusion that
the problem of inflation has somehow been taken care of and that,
therefore, stimulative policies not otherwise appropriate may safely
be followed. This has been the road to real inflation, as Table 9 in
this study suggests.
The authors of this book labored with great dedication in the
vineyards of the Economic Stabilization Program. Their performance
was uniformly thoughtful, constructive, and balanced. They were
responsible for some first-class analysis as the program unfolded.
Now, in helping us all to gain a better perspective on this episode in
our economic history, they have once again produced first-class
material.

G eorge P. S hultz

INTRODUCTION

From 15 August 1971 to 30 April 1974 mandatory controls on wages
and prices were a component of the economic stabilization policy
of the U.S. government. This experiment with "incomes policy" was
the first peacetime wage and price control program in the United
States. During the period marked changes occurred in the economic
and political environment, in the structure of the program, in the
rigor with which controls were administered or were perceived to be
administered, and in the rates of price change that emerged. The
pace of economic activity ranged from the early stages of a slow
cyclical recovery to an extraordinarily vigorous boom in demand,
followed by a period of short supply of basic materials, particularly
petroleum products, and sharply curtailed production growth. Con
sumer price inflation initially declined from an annual rate of slightly
below 4 percent in the eight months preceding controls to approxi
mately 3 percent during the first year of controls. But it rose to
"double digit" rates of 11.5 percent in the eight months before con
trols were ended and to 12.2 percent in the eight months after
controls were removed.
To assess the influence of controls as an economic policy tool
only in terms of what happened to the inflation rate while they were
in force would obviously be much too superficial. Price and wage
trends occurring under controls are conditioned by the need to allow
flexibility for adjustments in response to changes in the market
environment, or to adapt the controls so as to contain pressures for
significant departures from equilibrium and to keep resources in the
channels from which price suppression threatens to divert them.
During the period of controls, changes in overall demand levels were
of central importance in the market environment, but changes in

supply conditions for particular sectors originating from both domestic
and foreign sources were also important.
The extent to which controls were intended to affect economic
goals other than prices—goals such as output, employment, invest
ment, and efficiency—is relevant in an evaluation of the effects of the
controls. Other factors that form part of the context in which con
trols were administered and that should be taken into account in
evaluating the controls are broader goals such as limited bureaucratic
intervention in price decisions and collective bargaining, balance-ofpayments goals, international trade and foreign policy interests,
maintenance of a competitive industrial structure, and preservation
of private incentives to promote innovation and efficiency. Finally,
a comprehensive assessment of controls should also look at economic
conditions and prospects prior to the imposition of controls and
developments after they were terminated.
The analysis and discussion in this paper is oriented toward an
assessment of controls as a temporary and supplementary "incomes
policy" tool. The analysis will look at their possible marginal influ
ence on inflation when they are administered with an emphasis on
avoiding serious short-term market disruption and minimizing adverse
long-term effects on the economy. Chapter 1 reviews the economic
and political developments that preceded the imposition of controls.
Chapter 2 looks at the design of the controls system and changes
in the structure of the program. In Chapter 3, the consistency of wage
and price behavior with the stabilization regulations is examined by
analyzing aggregate data on wage, price, and profits developments.
A more detailed analysis of the role of controls in major sectors
of the economy is presented in Chapter 4. The fifth chapter explores
the question of inefficiency and distortions attributable to controls,
while some broad issues concerning the role and limitations of direct
controls as a stabilization tool are addressed in Chapter 6. The con
clusions of the study are briefly summarized in Chapter 7.

1
BACKGROUND

Initially, a policy of gradualism that became known as the "game
plan" was put into effect to reverse the rise in the rate of inflation
that occurred in the last half of the 1960s.1 Rapid expansion of aggre
gate demand from 1964 through 1*966 after a period of relatively
stable prices had brought the unemployment rate down to well below
4 percent, a lower rate than had been experienced in the preceding
decade. After a pause in 1967, aggregate demand surged again in
1968. By 1969 the unemployment rate was 3.5 percent, with real
output growth tapering off and prices rising more rapidly than before.
The gradual slowdown in aggregate demand growth that began
during 1969 was induced by a swing from a substantial deficit to a small
surplus in the federal budget in fiscal year 1969 and a slower rate of
monetary expansion during 1969. A somewhat less pronounced decel
eration in monetary expansion (relative to inflation trends) had occurred
during 1966 and had been followed in 1967 by a slowdown in demand
growth, virtually stable unemployment, and a noticeable deceleration
in inflation, mainly confined to food prices. This experience sug
gested the promise of a policy of gradually reducing demand growth
to a rate that would create pressures for smaller instead of larger price
increases, without increasing unemployment so much that persistence
in such a policy path would become politically untenable.
Adjustments in the economy in response to stringent fiscal policy
and slower monetary expansion were expected to run in the following
sequence: 2 slower growth in total spending in the economy, slower
1 Paul W. McCracken, "The Game Plan for Economic Policy," Proceedings of the
American Statistical Association, Business and Economic Section (New York,
19-22 August 1969), pp. 294-98.
2 See, for example, Economic Report of the President, 1970 (Washington, D. C.:
U.S. Government Printing Office, February 1970), pp. 25-27.

production growth, pressure on profit margins and slower employ
ment growth, smaller wage increases, and finally lower price inflation.
The calibration of federal policy instruments necessary to introduce
an appropriate degree of disequilibrium and the lags in the process
were interrelated and uncertain. It was essential to restrain total
spending growth enough to set in motion an adjustment process that
would lead to deceleration in price increases, but a longer-thananticipated lag before prices began to decelerate would result in lower
real output levels and higher unemployment than were intended.
By the end of 1970 inflation had proved to be more persistent
than had been expected. As a result real output was lower and prices
and unemployment were higher than the earlier official projections.3
These conditions persisted during the first half of 1971, with relatively
slow output growth in the second quarter after a rebound in the first
quarter from the strike-depressed fourth quarter of 1970. During the
first half of 1971 both wholesale prices and the private GNP deflator
increased at rates roughly similar to those at which they increased
in the previous two years, although consumer prices were increasing
less rapidly. The unemployment rate hovered at 6 percent, up from
3.5 percent in 1969. There were no clear indications that unemploy
ment would be reduced appreciably in the ensuing months through
more rapid demand growth, and the evidence that inflation was
subsiding was tenuous. Furthermore, the rate of price increase,
particularly for wholesale prices of industrial commodities, remained
high by the standards suggested by the experience of the early 1960s,
and the worsening balance of payments was an ominous cloud on
the horizon.
The Political Context
There were several indications that the game plan was being played
in economic overtime by the beginning of 1971. Unemployment had
reached a level that threatened to be politically damaging to the Nixon
administration in the absence of firm prospects that it would recede.
Public and congressional sentiment became increasingly unfavorable
toward the explicitly noninterventionist policies of the administration
and shifted toward a preference for direct action to restrain "exces
sive" wage and price increases.
®The disappointing performance and the questions that it raised about reasons
for the slow response are illustrated in the Economic Report of the President,
1971 (February 1971), p. 28 and p. 60ff.

These conditions provided a climate in which the Democratic
Congress enacted legislation in August 1970 authorizing mandatory
controls. Whether or not such authority was used, the legislation
could be used to embarrass the President and his party.4 Business
attitudes were conditioned by two years in which profits were ground
between the millstones of rapidly increasing labor costs and markets
in which these costs could not readily be passed through by increasing
prices. In October 1970 the Business Council criticized the lack of
direct action on wages and prices, a criticism that was reaffirmed in the
spring.5 The Committee for Economic Development, another business
group, issued a policy statement in November 1970 recommending
establishment of a stabilization body to establish "broad norms" for
wage and price behavior.6 On the labor side, the AFL-CIO had taken
a position in support of "equitable" controls if the President deter
mined they were necessary and George Meany had stated his view
that they were.7 Also, within the federal government several high
officials had proposed some form of incomes policy, the most promi
nent being Arthur Burns, who had become chairman of the Federal
Reserve Board in 1970.8
Faced with these developments, the administration was increas
ingly on the defensive in maintaining its noninterventionist stance.
In June 1970, the President established the National Commission on
Productivity and the Regulations and Purchasing Review Board, and
announced that periodic "inflation alerts" would be prepared by the
Council of Economic Advisers. In January of 1971, the President
directed the Cabinet Committee on Economic Policy to analyze
conditions in the steel industry in the wake of announced price
increases for some steel products. The Council of Economic Advisers
was to report immediately to the committee any "exceptionally infla
tionary wage or price developments" 0 so that appropriate federal
4 See also Lloyd Ulman's discussion of this aspect of the politics of incomes
policies in "Phase II in Context: Towards an Incomes Policy for Conservatives/'
Incomes Policy: What Can We Learn From Europe?, ed. Walter Galenson (Ithaca,
N. Y.: New York State School of Industrial and Labor Relations, Cornell Uni
versity, 1973), p. 92.
5 Arnold R. Weber, In Pursuit of Price Stability (Washington, D. C .: The Brook
ings Institution, 1973), p. 6.
6 Further Weapons against Inflation (Washington, D. C.: Committee for Economic
Development, 1970).
7 Weber, In Pursuit of Price Stability, p. 5.
8 The most widely noted statement by Burns was the Pepperdine speech, "The
Basis for Lasting Prosperity," address in the Pepperdine College Great Issues
Series, Los Angeles, California, 7 December 1970.
9 Economic Report of the President, 1971, p. 82.

action could be considered. The Construction Industry Collective Bar
gaining Commission had been established in September 1969, and
federal action had been taken to reduce construction spending and
encourage training of more skilled construction labor, but there had
been no relief during 1970 from increasingly large construction wage
increases and the pressures they created for similar wage increases in
other sectors. On 29 March 1971 the Construction Industry Stabili
zation Committee was established to place mandatory controls on
construction wages. After a review of the economy by the adminis
tration in June, decisions were announced not to apply additional
stimulus to demand and not to establish an incomes policy. These
statements proved to be the last strong official reaffirmation of the
game plan.10 Larger trade deficits and the increased vulnerability
of the dollar to massive conversion into other forms of reserves were
added to continuing disappointing news on prices and production,
triggering the President's dramatic announcement of the New Eco
nomic Policy on 15 August 1971.
Economic Conditions in Mid-1971
By mid-1971 the game plan had been successful in bringing about
some elements in the sequence of adjustments envisioned for the
process of reducing inflation.11 Slower monetary expansion combined
with fiscal policy restraint had reduced the growth of total spending/
slowed production and employment growth, squeezed profits, and
10 The extent to which the public dialogue on inflation had come to be focused
on incomes policy and the defensive position in which this placed the administra
tion is illustrated by a statement by Paul McCracken, chairman of the Council
of Economic Advisers, that "we have now in effect many elements of what has
come rather loosely to be called an incomes policy. We are now considering ways
to make these elements more systematic and comprehensive, and to provide more
adequately for their management/' U.S. Congress, Joint Economic Committee,
The 1971 Economic Report of the President, 92d Cong., 1st sess. (5, 9, 17, 18, and
19 February 1971), p. 9.
11 For a detailed review of stabilization developments and policy in the period
before the introduction of controls, see Phillip Cagan, Marten Estey, William
Fellner, Charles E. McLure, Jr., and Thomas Gale Moore, Economic Policy and
Inflation in the Sixties (Washington, D. C.: American Enterprise Institute, 1972).
For examples of discussions raising questions about changes in the response of
outPut growth and inflation to aggregate demand changes, see Robert J.
Gordon, Inflation in Recession and Recovery/' Brookings Papers on Economic
Activity, no. 1 (Washington, D. C.: The Brookings Institution, 1971), pp. 105-58,
and the following papers in Brookings Papers on Economic Activity, no. 2 (1971):
Charles L Schultze, "Has the Phillips Curve Shifted? Some Additional Evidence/'
PP*, ~ '
J551Kellner, "Phillips-type Approach or Acceleration?" pp. 469-83;
Arthur Okun, The Mirage of Steady Inflation," pp. 485-98; and Robert J.
Gordon, Steady Anticipated Inflation: Mirage or O asis?" pp. 499-510.

stabilized or reduced the rate of price inflation. The game plan had
succeeded in achieving the early stages of the disinflation process,
but further reduction in inflation depended on a trend toward smaller
labor cost increases that had not yet emerged. While wages in some
sectors were increasing less rapidly than before, very large increases
in other sectors kept average hourly labor costs increasing at a roughly
stable rate.
These developments raise two issues concerning stabilization
policy performance before and after controls were imposed. One is
the extent to which the buildup of significant distortions in the wage
structure contributed to a slower unfolding of the disinflation process
than had been projected. The other is the extent to which improved
balance in the wage structure and prospects for more rapid produc
tivity growth pointed to the possibility of improved economic per
formance after 1971 with or without wage and price controls.
Wages and Collective Bargaining.12 The unemployment rate rose from
3.5 percent in 1969 to about 6 percent in late 1970. However, reduced
growth of demand in labor and product markets was not accompanied
by smaller wage increases. Adjusted average hourly earnings for the
private nonfarm sector rose by 6.7 percent in 1970 and 7.0 percent
in 1971, indicating that wage rates were increasing more rapidly than
they had when unemployment rates were lower. New first-year wage
increases under collective bargaining agreements in manufacturing
rose from an average of about 8 percent in 1969 to nearly 11 percent
in 1971 even though the unemployment rate in manufacturing in
creased from 3.3 percent in 1969 to 6.8 percent in 1971.
Continuing large wage increases under new collective bargaining
agreements negotiated in 1970 and 1971 had their roots in earlier
trends in prices and other wages. Wages for workers covered by
long-term wage contracts in the late 1960s were depressed relative
to those of other workers who received wage increases that more
quickly reflected the strong labor market demand and accelerating
inflation that prevailed during this period. When long-term contracts
expired, there were strong pressures to restore the relative wage
positions of the workers they covered through heavily front-loaded
new contracts, because the deterioration of their position in the
wage structure had resulted primarily from an unanticipated increase
in inflation.
12 For a more detailed discussion of wage structural developments discussed in
this section, see Marvin Kosters, Kenneth Fedor, and Albert Eckstein, "Collective
Bargaining and the Wage Structure," Labor Law Journal, vol. 24, no. 8 (August
1973), pp. 517-25.

The pattern of relatively small increases during the term of
existing wage contracts is illustrated by data that show large first-year
wage increases under major collective bargaining agreements compared
to deferred wage increases, and deferred increases that were generally
smaller than wage increases received by the average worker from
1968 through 1971 (Appendix Table A-l). A similar pattern is shown
by data on wage increases for union and nonunion workers in
manufacturing. These data show relatively small wage increases for
union workers from 1965 through 1969 (Appendix Table A-2). The
influence of long-term contracts on the wage structure during the
period of rising inflation is also evident in average hourly earnings
changes for industry sectors in which most workers were covered by
long-term wage contracts.
Data on average wage increases in six major industry sectors in
which most workers were covered by long-term collective bargaining
agreements with common expiration dates show deterioration in the
relative wage position of these workers during the term of their
contracts (Table 1). These workers received smaller wage increases
than were received by the average private nonfarm worker in the two
contract periods shown for each industry between 1966 and 1971.
When new agreements were negotiated, average wages in the sectors
covered increased by more than average wage increases for private
nonfarm workers. In other words, there was a tendency to com
pensate at the time of negotiation for smaller wage increases during
the term of the previous contract. The data in Table 1 suggest that
inflation-induced distortion in the wage structure created conditions
leading to unusually large first-year wage increases in major union
settlements, particularly in 1970 and 1971.13 These large negotiated
wage increases contributed directly to rapid increases in hourly labor
costs and influenced wage changes for related workers, impeding
any significant reduction in inflation in spite of considerable slack
in labor and product markets.
Large first-year wage increases for the great number of workers
covered by contracts expiring in 1970 and 1971 had a significant
direct influence on overall hourly labor cost increases. Their total
This analysis is an application of wage structural concepts to the particular
inflationary conditions of the late 1960s and early 1970s. Wage structural con
cepts have been applied in many studies of wage determination under collective
bargaining, with concepts in this closely related body of ideas called "wage
contours (Dunlop), "orbits of coercive comparison" (Ross), "wage constella
tions (Harbison), and "neighboring strategic wage rates" (Bronfenbrenner and
Holzman). See Martin Bronfenbrenner and Franklyn D. Holzman, "Survey of
Inflation Theory," American Economic Review, vol. 53, no. 4 (September 1963),
p. 618.

Table 1
AVERAGE HOURLY EARNINGS INCREASES FOR SELECTED
INDUSTRIES COVERED BY LONG-TERM COLLECTIVE
BARGAINING AGREEMENTS AND WAGE INCREASES UNDER
COLLECTIVE BARGAINING AGREEMENTS IN MANUFACTURING
Annual Percentage Change in
Average Hourly Earnings

Private nonfarm
Rubber
Autos
Trucking
Steel
Metal cans
Communications

1966

1967

1968

4.5

4.7

6.3

3.4
2.9
2.9

5.6
8.6
6.0
1.1
3.4
3.2

1969

1970

1971

6.7

5.9

6.5

4.7
5.5
6.0

5.4
13.1
13.8

6.0
10.0
9.4

3.5
4.2
3.4

11.9
11.5
14.7

8.1
4.6

10.9
4.8

Manufacturing only (collective
bargaining agreements)
First-year increases
Deferred wage increases

7.0
3.9

7.9
4.0

Note: Percentage changes in average hourly earnings were computed as per
centage changes in the average from the preceding year, except for those of
industry sectors for the year in which new contracts were negotiated. New
contracts were negotiated in the rubber, auto, and trucking industries in 1967
and 1970 and in the steel, metal cans, and communications industries in 1968
and 1971. The percentage increase in average hourly earnings in those industries
for years in which new contracts were negotiated was computed by comparing
average wages for a six-month period after the new contract was negotiated with
the average for the same six-month period a year earlier. The particular months
chosen are shown in Marvin Kosters et ah, “Collective Bargaining and the Wage
Structure,” Labor Law Journalf vol. 24, no. 8 (August 1973), p. 522, Table 3.

contribution to rising hourly labor costs, though difficult to quantify,
was certainly much larger than the direct effects of the newly negoti
ated wage settlements. A major share of the unexpectedly slow
decline in wage and price increases in 1970 and early 1971 could have
resulted from this much more serious and pervasive pattern of distor
tion in the wage structure than had been previously experienced during
a cyclical slowdown in the economy. Imbalances in the wage structure
and the large "catch-up" wage increases in 1970 and 1971 that reduced
these imbalances created a transitional lag in wage developments.
The pervasiveness of these imbalances also suggests that it would
have been extremely difficult to embark on an incomes policy that

relied heavily on a simple numerical wage standard, because its
credibility could not easily be maintained when pressures for large
catch-up wage increases by major unions were so strong.
Productivity and Prices, Continued acceleration of new, first-year
wage increases under major collective bargaining agreements occurred
throughout the period 1969-71. Smaller wage increases did occur in
some sectors, such as nonunion manufacturing establishments/ in
spite of the demonstration effect of large wage increases for major
unions, but this was part of the process through which balance in
the wage structure was restored. While the make-up of contributions
to higher average hourly labor costs shifted markedly between 1969
and 1971, the rate at which average hourly labor costs were increasing
remained roughly unchanged from 1968 through 1971.
Extraordinarily slow productivity growth in 1969 and 1970,
though a normal cyclical development, was protracted by the depress
ing effect on real output growth of the sluggish response of wages
and prices to demand restraint. Combined with continued large
average hourly labor cost increases, this slow productivity growth
produced extremely large increases in labor costs per unit of output.
Slack demand in product markets kept businesses from fully recouping
the labor cost increases so that profits declined markedly in both
1969 and 1970. Because unit labor cost increases were so large and
accounted for such a large share of total costs, the decline in profits
could not absorb them, and as a result large price increases continued.
There are several points worth noting here. Pressures for the
restoration of balance in the wage structure delayed the arrival of
smaller hourly labor cost increases. This delay, and its influence on
prices, generated a short-term real output growth path that was
lower than had been projected, reinforcing cyclically slow productivity
growth and intensifying the pressure of costs on prices. The preva
lence of these cost pressures led to a "cost-push" diagnosis of the
malady and influenced the design of criteria for price adjustments
under the ensuing controls. Slow productivity growth precluded
normal increases in real wage and income levels, thereby intensifying
pressures for large wage increases, while profits were squeezed to the
point where significant increases could be expected in a balanced
recovery.
The Outlook in Mid-1971. By mid-1971 conditions had been created
for a period of better economic performance. Better performance
would require enough strength in aggregate demand to increase the
10

pace of economic activity and enough stability (or some continued
decline) in inflation so that stronger demand would raise production
and employment levels and would not be dissipated in larger price
increases. Prospects were favorable for improved wage and price
performance during the cyclical recovery.
On the labor cost side, the period had passed in which pressures
for large wage increases under new collective bargaining agreements
were most severe. Moreover, deferred wage increases built into
existing contracts had stabilized (Figure 1). Deferred increases
scheduled to go into effect for 1972 were estimated to be slightly
lower than for 1971. While there were some contracts for which large
wage increases could be expected—coal miners, railroad workers and
longshoremen—the collective bargaining calendar for 1972 showed
fewer workers scheduled to negotiate new agreements and fewer
large pattern-setting wage situations than there had been in 1970 and
1971. Moreover, large wage increases were not generally necessary
to attract or retain labor in view of the slack in labor markets.
Productivity growth prospects were also favorable during the
cyclical recovery in production that was under way. Roughly stable
(or even somewhat smaller) hourly labor cost increases combined
with more rapid productivity growth could reduce unit labor cost
increases, thereby making possible smaller price increases, rising
real wages and incomes, and some recovery in profits (Figures 2
and 3). Depressed capacity utilization rates suggested ample room
for expansion of production without resulting in supply conditions
that would create pressure for price increases or generate shortages.14
Thus, there was a reasonable prospect for a cyclical rise in
productivity growth that would permit real incomes and profits to
rise and relieve pressures for large wage and price increases. Realiza
tion of this outcome was not assured, however. The trend in newly
negotiated wage increases might have been slow to respond to
improved balance in the wage structure. Expectations of continued
inflation and of possible direct action to restrain inflation might have
contributed to persistence in price increases. Expansionary aggregate
demand policies might consequently have been disproportionately
translated into inflation rather than into real output growth.
14 In discussing labor cost, productivity and price prospects at a Cornell Uni
versity conference held in April 1972, Lloyd Ulman recognized that these condi
tions were favorable for an apparently successful incomes policy: "Thus, the
policy of restraint could be effective or appear to be effective (if the stimulus to
expansion came from other quarters), even if it did not succeed in its conventional
task of restraining wage settlements directly. This could be regarded as the
Indian Rope Trick Theory of incomes policy." Ulman, "Phase II in Context,"
p. 91.

Figure 1
WAGE INCREASES UNDER MAJOR
COLLECTIVE BARGAINING AGREEMENTS

14 "
First year increases
(median)

12-

108-

64-

2<n

0
(A

(0
<D
O

• -

_L
1963

i
65

71
(9 mo.)

B 8
c
o

Increases over life of contract
(median)

§ 6

-L
1963

_L
65

i
69

71
(9 mo.)

Note: These figures are for all industries and reflect wage increases only.
Source: U.S. Department of Labor, Bureau of Labor Statistics.

Figure 2
CHANGES IN PRODUCTIVITY, COMPENSATION, AND UNIT
LABOR COSTS IN THE PRIVATE NONFARM ECONOMY, 1960-71
Compensation per man-hour

I
1
1960

I
I1
63

1
68

i
69

* First three quarters of 1971 over first three quarters of 1970.
Source: U.S. Department of Labor, Bureau of Labor Statistics.

Figure 3
CHANGES IN PRICES, LABOR COSTS, AND PROFITS FOR
NONFINANCIAL CORPORATIONS, 1960-71
Unit prices

i
71

Percentage

change

1960

12
Unit profits before taxes

-4

-8
-12
-1 6
-1 8
1960

-I------1------1------1____ I____ !____ L
65

* First three quarters of 1971 over first three quarters of 1970.
Source: Department of Commerce, Bureau of Economic Analysis.

2
THE NEW
ECONOMIC POLICY

The three elements of the New Economic Policy announced on
15 August 1971 were (1) suspension of dollar convertibility into gold
and imposition of an import surcharge to deal with the balance-ofpayments problem, (2) requests to Congress for an investment tax
credit and other tax changes to stimulate output and employment,
and (3) imposition of a ninety-day freeze on prices, wages, and rents.
The New Economic Policy was motivated in large part by high
unemployment and was triggered by the international situation—
specifically an impending request for conversion of about $2 billion
into gold. The element of the New Economic Policy with the most
dramatic public impact was the freeze, even though the freeze and
the system of controls that followed were intended as a short-term
complement to the other policy changes and as a program to speed
up the disinflation process that was already under way. The unex
pected deterioration in price performance in 1973 meant, however,
that extrication of most of the economy from controls was not com
pleted until the authorizing legislation was allowed to expire on
30 April 1974.
Structure of the Controls
There were major changes in the organizational structure and adminis
tration of controls after the initial freeze and these changes were
widely regarded as marked changes in controls policy. The conceptual
basis for the regulations applicable to price and wage adjustments
remained essentially unchanged, however, for most of the economy
during the two and a half years from November 1971 through April
1974, except for the second brief freeze in mid—1973. Both regulations

Table 2
REGULATIONS OF THE CONTROLS PROGRAM,
PHASES II, III, AND IV
Phase II
14 November 1971
to 11 January 1973

Phase III
11 January 1973
to 13 June 1973

Phase IV
12 August 1973
to 30 April 1974

Percentage pass-through of al
lowable cost increases since
last price increase, or 1 Jan.
1971, adjusted for productivity
and volume offsets. Term limit
pricing option available.

Self-administered standards of
Phase II.

In most manufacturing and ser
vice industries dollar-for-dollar
pass-through of allowable cost
increase since last fiscal quar
ter ending prior to 11 Jan.
1973.

Profit margin limitations

Not to exceed margins of the
best 2 of 3 fiscal years before
15 Aug. 1971. Not applicable
if prices were not increased
above base level, or if firms
"purified” themselves.

Not to exceed margins of the
best 2 fiscal years completed
after 15 Aug. 1968. No limita
tion if average price increase
does not exceed 1.5 percent.

Same years as Phase III, ex
cept that a firm that has not
charged a price for any item
above its base price, or ad
justed freeze price, whichever
is higher, is not subject to the
limitation.

Wage increase limitations

General standard of 5.5 per
cent. Exceptions made to cor
rect gross inequities, and for
workers whose pay had in
creased less than 7 percent a
year for the last 3 years. Work
ers earning less than $2.75 per
hour were exempt. Increases in
qualified fringe benefits per
mitted raising standard to 6.2
percent.

General Phase II standard,
self-administered. Some spe
cial limitations. More flexibility
with respect to specific cases.
Workers earning less than $3.50
per hour were exempted after
1 May.

Self-administered standards of
Phase III. Executive compen
sation limited.

Program
GENERAL STANDARDS
Price Increase limitations

PRENOTtF/CATfON
Prices

Prenotification required for all
firms with annual sales above
$100 million, 30 days before
implementation, approval re
quired.

After 2 May 1973, prenotifica
tion required for all firms with
sales above $250 million whose
price increase has exceeded a
weighted average of 1.5 per
cent.

Same as Phase II except that
prenotified price increases may
be implemented in 30 days
unless CLC requires otherwise.

For afl increases of wages for
units of 5,000 or more; for all
increases above the standard
regardless of the number of
workers involved.

None.

Quarterly for firms with sales
over $50 million.

Quarterly for firms with sales
over $250 million.

Quarterly for firms with sales
over $50 million.

Wages

Pay adjustments below stan
dard for units greater than
1,000 persons.

Pay adjustm ents for units
greater than 5,000 persons.

Same as Phase 111.

SPECIAL AREAS

Health, insurance, rent, con
struction, public utilities.

Health, food, public utilities,
construction, petroleum.

Health, food, petroleum, con
struction, insurance, executive
and variable compensation.

EXEMPTIONS

Raw agricultural commodities,
import prices, export prices,
firms with 60 or fewer em
ployees.

Same as Phase II plus rents.

Same as Phase 111 plus public
utilities, lumber, copper scrap,
and long-term coal contracts,
initially with sector-by-sector
decontrol of prices and wages
until 30 April 1974.

Wages

REPORTING
Prices

Source: Cost of Living Council.

and procedures were modified over time, but the initial wage standard
was not formally changed and the standards for price adjustments
generally permitted costs to be passed through with profit margin
limitations if prices were increased.
The broad outlines of the standards, procedures, and coverage of
the program are summarized in Table 2. This material set forth in
the table is amplified in the text by a discussion of some of the salient
features of the program's organization and administration.1 Some of
the more detailed technical aspects of the rules and their practical
effects are considered in later chapters.

Phase II
The Cost of Living Council established the price goals for the
stabilization program, exercised authority over procedural issues and
issues of coverage, coordinated policies and activities of the other
stabilization bodies, and retained planning and policy development
responsibility. The goal of reducing inflation to 2 to 3 percent by
the end of 1972 was established to permit a gradual reduction in
inflation (after an upsurge in the wake of the freeze) and to establish
a context within which the Pay Board and Price Commission could
develop and administer their standards. Raw agricultural products
were the major sector exempt from controls, and coverage remained
basically unchanged during the program, except for the small-firm
exemption in May 1972 and the decontrol process in late 1973 and
early 1974. A stabilization unit within the Internal Revenue Service
was established to provide the field organization for the program
and to conduct auditing and enforcement activities.2
1 This study includes little discussion of Phase I, the wage-price freeze of 1971/
which is the subject of a careful study by Arnold R. Weber, In Pursuit of Price
Stability, cited earlier. Weber was director of the Cost of Living Council during
the freeze and served as a public member of the Pay Board during Phase II.
A very brief and lucid sketch of the stabilization program is contained in
John T. Dunlop, "Inflation and Incomes Policies: The Political Economy of Recent
U.S. Experience," Eighth Monash Economics Lecture (Monash University,
Australia, October 1974).
2 The director of the Cost of Living Council was Donald Rumsfeld, who was
also counselor to the President. The council was chaired by the secretary of the
treasury, initially John B. Connally and beginning in the second quarter of 1972
George P. Shultz. In addition to the Pay Board and Price Commission, the
Construction Industry Stabilization Committee was continued as an operating
unit and the Committee on Interest and Dividends was established. In addition,
three advisory committees were created: the Health Services Industry Committee,
the Committee on State and Local Government Cooperation, and the Rent
Advisory Board.

Phase II began on 14 November 1971. One of its distinguishing
features was its heavy reliance on self-administration. The formal
coverage of the standards was broader than the reach of adminis
trative intervention through formal review of individual wage and
price adjustments. A system of differentiated administrative pro
cedures based primarily on size of firms and employee units was
devised to reconcile broad coverage with limited administrative
involvement. Administration of the controls was influenced in several
ways by the administration's desire to minimize intrusion by a federal
bureaucracy into price and wage decisions.
First, heavy reliance was placed on self-administration of the
standards for smaller units; these units were subject only to periodic
review or a small probability of possible audit. In this respect, the
regulations were administered in a way similar to the way the
personal income tax is administered. Second, the standards were
designed to be generally applicable in order to permit self-administration, even though they were often difficult to apply to particular
cases and inevitably much too simple to cover the full range of
complex situations in the economy. Third, the regulations were
applied to individual firms or employee units with relatively little
consideration for industry price patterns and cost patterns or for
wage patterns among industries, crafts, and occupations. These
characterizations apply with particular force for Phase II. A more
varied and complex approach was evolved beginning in 1973,
reflecting changes in market conditions and an increased recognition
of the inappropriateness of such a simplified approach over time.
Wages. A general numerical standard for wage increases was estab
lished, permitting compensation adjustments of up to 5.5 percent
without prior notification or review for all except the largest employee
units. Although criteria for exceptions were also provided, the wide
applicability of the standard left little scope for adjustments in the
wage structure. The intellectual roots of this approach can be traced
to the rationale for the guideposts of the early 1960s. Its public
acceptability as a credible approach owed much to widespread public
discussion of the potential contribution of a general numerical norm
for wage increases.3 Moreover, it was compatible with an emphasis
3 The guideposts outlined in the 1962 Economic Report were put forward as a
contribution to public discussion, and the impact on public attitudes of wide
spread discussion of the concept may be illustrated by the opening sentence
of the policy statement adopted by the Pay Board on 8 November 1971 establish
ing the general standard: "Millions of workers in the Nation are looking to the
Pay Board for guidance with respect to permissible changes in wages. . . .
It may also be illustrated by the reaction of the press to the statement of the

on self-administration. Under the wage standard, wages and fringe
benefits were treated as perfect substitutes. This treatment was con
sistent with an emphasis on the cost implications of pay adjustments,
but it complicated the treatment of situations in which large fringe
benefit increases were at issue.4
While differential procedural treatment for wage adjustments
was formally based on employee-unit size, in practice the review and
formal approval of pay adjustments was restricted largely to increases
that exceeded the general standard with self-administration generally
applicable to increases within the limits of the standard. Although
the pay standard was widely viewed by the public as setting a limit
of 5.5 percent (later recognized to be 6.2 percent under provisions
dealing with fringe benefits), the actual standard and the way it was
administered were more complex. Pay increases of up to 7 percent
were permitted for deferred wage increases and as exceptions for
tandem relationships, for "catch-up" to offset relatively small previous
wage increases and for retaining essential employees. Increases
exceeding those explicitly permitted by the regulations could be and
were often permitted after review of a particular case.5
The regulations covering wage increases were initially developed
and administered by a tripartite Pay Board.6 After four of the five
original labor representatives withdrew their participation on 22 March
1972, the Pay Board was reconstituted as a public body with seven
members. While a measure of underlying labor cooperation and
acquiescence was retained throughout Phase II, organized labor's
formal participation in the program was not renewed until the advent
of Phase III. Labor participation at a policy level instead of an
Labor-Management Advisory Committee of 26 February 1973 stating that
"no single standard or wage settlement can be equally applicable at one time to
all parties in an economy so large, decentralized and dynamic." See, for example,
"The Magic Number Is a Blur/' New York Times, 4 March 1973, and Edward
Cowan, "Hocus-Pocus on Wage Guidelines/' New York Times, 11 March 1973.
4 Later in 1972, in response to an amendment to the Economic Stabilization Act,
provision was made for larger than previously permitted pay increases to reflect
introduction of improvements in "qualified fringe benefits"—mainly pensions.
The coal settlement, the first case reviewed by the Pay Board, included a large
increase in labor costs that was necessary to assur6 the solvency of the pension
fund. It provides an example of how wage issues are complicated by circum
stances unique to the situation under review.
5 For a perceptive discussion of problems in the administration of wage controls
and the emphasis that was placed on a general standard with few exceptions,
see Arnold R. Weber, "Making Wage Controls Work," The Public Interest, no. 30
(Winter 1973), pp. 28-40.
6 The chairman of the Pay Board was George H. Boldt, and the board was
initially composed of fifteen members—five representing the general public, five
representing business, and five representing labor.

operating level was obtained through establishment of the LaborManagement Advisory Committee, and a significant impetus for
restructuring the program in Phase III came from a recognition
that a participatory and cooperative role for labor was essential for
any program of wage and price restraint*
Prices. The pricing standards for Phase II were developed and admin
istered by the Price Commission.7 Price adjustments were permitted
if there had been cost increases, subject to the provision that these
price increases did not lead to profit margins that exceeded limits
established by a base period. Both the cost pass-through and profit
margin rules were applied on a firm-by-firm basis, an approach that
made self-administration feasible. All firms except the largest could
apply the regulations themselves in making price adjustments. The
largest firms had to submit requests for price increases and secure
approval before those increases could be put into effect. For retail
and wholesale operations the cost pass-through regulations permitted
maintenance of percentage markups on the cost of merchandise only,
while in the manufacturing and services sectors increases in all
allowable costs incurred could be passed through on a percentage
basis. Price increases to reflect increased Tnerchandise costs for
retailers and wholesalers were self-administered even in the largest
firms, as were price adjustments for producers of products for which
major input costs were exceptionally volatile—for example, in meat
packing operations. More specialized rules, also based on cost pass
through concepts, were developed for health services, insurance, and
rents.
The Shift to Phase III
The restructuring of the stabilization program for Phase III was
designed to provide a way station out of controls and to secure
renewed cooperation in a program of wage and price restraint. From
the time they were initially imposed, wage and price controls had
been viewed by the administration as a short-term approach. It was
repeatedly announced that the goal was to terminate controls as soon
as this was feasible.8 Phase III was intended to be a transitional stage
7 The chairman of the Price Commission, composed of seven public members,
was C. Jackson Grayson.
8 See, for example, the President's address announcing the freeze, and "Back
ground for the Post-freeze Economic Stabilization Program/' Cost of Living
Council, 7 October 1971.

in the process of removing mandatory wage and price controls. At the
same time it was intended to contribute toward continued restraint.
One element in this restraint involved enlisting the cooperation of
organized labor during a year in which the bargaining calendar was
heavy and a resurgence of large wage increases regarded as likely
by many observers.9 The other major element involved special atten
tion to sectors in which continuing inflation problems were regarded
as most severe, not only through the application of specialized controls
mechanisms but also by an emphasis on federal policies influencing
supply, particularly in the agricultural sector. How much Phase III
contributed to restraint is a complex problem, but it clearly failed
as an attempt to remove controls. Its demise came with the imposition
of a new price freeze after five months of retreat from flexibility and
self-administration.
The major organizational changes in Phase III were the termi
nation of the Pay Board and Price Commission and the assumption
of operational responsibility by the Cost of Living Council.10 New
committee structures were formed for the food and health sectors
(an advisory committee with private sector representatives and a
government committee to review federal policies influencing inflation
for each sector) while the Construction Industry Stabilization Com
mittee continued to operate. Standards and procedures in these three
sectors continued basically unchanged from what they were in
Phase II.
For other sectors of the economy the major substantive changes
in the program were a modification of the price standard and a change
in the administration of price and wage standards. The price standard
was modified so as to reduce the constraining influence of profit
margin limitations; the profit margin limitation was removed for firms
with cost-justified price increases averaging less than 1.5 percent,
and the base period that could be used in computing the profit margin
limits was extended forward to the most recently completed fiscal
year. Prenotification requirements for wages and prices were termi
nated, although quarterly reports were required for the largest units.
Moreover, broad conformance with the standards was required instead
9 See Don R. Conlan, "1973 U.S. Economic Outlook," New York Times, 3 Sep
tember 1972, and the editorial, "Phase III Controls: Too Vague, Too Narrow,
Too Weak/' in Business Week, 10 March 1973, in which labor leaders were said
to be "openly scornful of the idea that wage increases can be held to the 5.5%
guideline of Phase II."
10 John T. Dunlop became the director of the Cost of Living Council when
Phase III was introduced. He had been chairman of the Construction Industry
Stabilization Committee since its inception.

of detailed technical compliance with regulations, since detailed tech
nical compliance would need to be accompanied by increasing com
plexity and detail in the regulations and carefully spelled-out rulings
for particular situations. These changes toward "voluntary" and
"self-administered" standards were perhaps of most substantive
importance and generated most public interest.
On the wage side, the new director affirmed as one of his guiding
principles the statement by the Labor-Management Advisory Com
mittee that "no single standard or wage settlement can be equally
applicable at one time to all parties in an economy so large, decen
tralized, and dynamic."11 Although the change in emphasis was
widely viewed as a repudiation of the wage norm for Phase II, the
main practical effect of the change was to give more explicit attention
to wage structural relationships and patterns but not to raise the
average level of wage settlements.12 On the price side, one of the
most revealing indications of the direction in which the program was
oriented was the clause in the general price standard permitting
adjustments that would otherwise exceed the standards "as necessary
for efficient allocation of resources or to maintain adequate levels
of supply." Apart from the unwinding of delays that had previously
been introduced by prenotification requirements, there was little
formal change in the substance of the regulations, however, because
the regulations, computational procedures, and rulings developed in
Phase II were to be used in self-administering adjustments in both
prices and wages.
The development and introduction of Phase III had been prem
ised on a view of the price outlook that was far more optimistic than
the inflation trend that actually emerged—a failure in prediction that
was shared by most professional forecasters.13 It was also based on
11 Statement of the Labor-Management Advisory Committee, 26 February 1973,
reprinted as Appendix G of Statement by Dr. John T. Dunlop, director, Cost of
Living Council, before the Subcommittee on Production and Stabilization of the
Senate Committee on Banking, Housing, and Urban Affairs, 6 February 1974,
p. A-67. Dr. Dunlop's entire statement is reprinted in Economic Stabilization Pro
gram Quarterly Report covering the period 1 January 1974 through 1 May 1974
(Washington, D. C.: U.S. Government Printing Office, 1974), pp. 129-381, and
in U.S. Congress, Senate Committee on Banking, Housing, and Urban Affairs,
Subcommittee on Production and Stabilization, Hearings: Oversight on Economic
Stabilization, 93d Cong., 2d sess. (30 and 31 January, 1 and 6 February 1974),
pp. 445-667.
12 Tripartite committees were established to review wage adjustments in the
food industry and the health services sector where self-administration was not
permitted.
13 See Appendix A of the Statement of Dr. John T. Dunlop, p. A-l, in which a
large number of inflation projections for 1973 are tabulated. The actual rise in

the view that the combination of substantive economic conditions in
the labor market (particularly the restoration of improved balance in
the wage structure) and the cooperative involvement of organized
labor in a program to maintain stability made wage restraint during
the year a realistic and achievable objective. Wage increases during
1973 were reasonably consistent with prospects as they were viewed
in late 1972, in spite of price increases much larger than had been
projected.14
The surge in food prices, led by large increases in meat prices,
began in December 1972. By the end of March, ceilings were imposed
on meat prices, based on the expectation at that time that food prices
would rise less rapidly later in the year and the view that temporary
meat price ceilings could therefore help to maintain restraint in wage
settlements. At the beginning of May, the acceleration of price
increases had become much broader and limited prenotification was
reinstituted to introduce some delay in the pass-through of increased
costs of a wide range of basic materials. By June the earlier optimism
regarding food prices later in the year was no longer tenable, and
accelerating price increases had become more pervasive throughout the
economy. The widespread perception that Phase III was a failure and
that a return to a controls structure similar to Phase II could contribute
to renewed stability undoubtedly influenced public and congressional
attitudes. The decision to terminate Phase III was the policy response.
The sharp acceleration of price increases in 1973 coincided closely
in timing with the shift to Phase III but owed little to modifications
in the standards of Phase II and their administration. Perhaps the
strongest evidence that the shift to Phase III was not responsible for
the acceleration is the fact that the acceleration began in food prices
and food prices remained the major contributor to higher living costs
through most of the year—even though mandatory controls on food
prices, including prenotification requirements, were retained through
out Phase III. Moreover, price increases in most other sectors were
supported by increased costs (according to the quarterly reports
covering the period), most of the largest price increases were within
the GNP deflator was over 5 percent while most projections were between 3 and
4 percent. The difference between the actual and projected rise in consumer
prices was even larger because food prices rose much more rapidly than most
other prices, and food accounts for a larger share of the consumer price index
than it accounts for in the GNP deflator.
14 For a statement on the administration's view of the wage outlook, see state
ment of George P. Shultz, secretary of the treasury and chairman, Cost of Living
Council, on 29 January 1973 in U.S. Congress, Senate Committee on Banking,
Housing and Urban Affairs, Hearings on 5. 398: A Bill to Extend and Amend
the Economic Stabilization Act of 1970, 93d Cong., 1st sess. (1973), pp. 11-12.

the limits permissible during Phase II, and profits and cost data from
other sources show no sharp break with earlier trends. Taken
together, this evidence indicates that the problem was not a failure of
compliance with the cost pass-through regulations that had been in
force since the program began. Consequently, the principal action
tool of Phase III, the "stick in the closet" to induce compliance, turned
out to be highly inappropriate as an instrument for tempering the
kind of inflation that emerged.
Freeze II and Phase IV
The public dialogue on inflation during the first half of 1973 was
dominated by discussion of controls and their apparent lack of
stringency. In this climate public and congressional pressures rose for
strong direct action. A price freeze announced 13 June 1973 was a
response to these pressures, despite economic judgments that its
disruptive consequences would outweigh its contribution to price
stability. The duration of the freeze was not to exceed sixty days;
it covered only prices, with wages to be adjusted under existing
standards and procedures; and it was to be followed by a stringent
program of controls. It was lifted on a sectoral basis as sectors were
placed under regulations similar to but somewhat more stringent than
those of Phase II, beginning 18 July with the food sector, where
market disruptions were most severe. The introduction of Phase IV
was also accompanied by announced intentions to decontrol on a
sector-by-sector basis.
The standards of Phase IV generally permitted pass-through of
increased costs, although there was more differentiation among
sectors in the application of this principle. Costs could only be passed
through on a dollar-for-dollar basis, however, which had not been
the case in Phase II, and prices in a number of sectors were signifi
cantly limited since further increases in prices were restricted to
increases in costs occurring since the last quarter of 1972 that had
not been reflected by price increases during that period. While situa
tions in which the price ceilings of Phase IV held prices below market
levels were far more numerous than situations in which the price
ceilings had suppressed them in earlier phases, this was mostly
attributable to changes in both domestic and world market conditions,
to more use of delays in sectors such as steel, and to specialized
sectoral regulations, particularly in the petroleum, health, and food
sectors.

The difference between 1972 and 1973 market conditions and the
extent to which the actual trend of consumer prices during the year
would depend on decisions and developments wholly unrelated to
controls is illustrated by two areas singled out by the President in his
announcement of the freeze—gasoline and food prices. In the
announcement he referred to strong export demand for farm prod
ucts, and requested from the Congress more flexible authority for
export controls. Comprehensive export controls for farm products
were not imposed, because it was recognized that their imposition
would seriously compromise other goals. However, stabilization of
food prices at retail was inconsistent with a dramatically rising cost
structure that reflected the rise of raw farm product prices on world
markets. While the full implications of rising crude oil prices were
not evident at this time, prices on world markets were rising above
domestic levels well before the embargo, and the U.S. economy was
dependent on supplies from foreign sources. Controls could and did
play a role in keeping petroleum product prices below levels they
would otherwise have reached, but there was no escape from the
significant price consequences of the tripling of imported crude oil
prices late in the year.
Although the Phase IV regulations were substantively similar for
most sectors to those that had been in force in Phase II, the general
policy approach that was followed differed in two fundamental ways.
There was less reluctance to tolerate temporary dislocations resulting
from the controls, such as dispersion in domestic prices and instances
of domestic prices below prices on international markets. These con
ditions had been mainly confined to the lumber industry during
Phase II. Though they were more prevalent and more severe during
Phase IV, remedial adjustments were usually not made unless it
could be demonstrated that these conditions would have seriously
harmful and costly effects. At the same time, initiatives for the
selective decontrol of individual sectors were carried forward, gradu
ally at first and at a faster pace in early 1974. Criteria for decontrol
and its timing were never publicly set forth in detail, but they fre
quently involved commitments from industry representatives with
respect to prices, investment, or improvement of industrial relations
practices.15 This approach helped to avoid a disorderly retreat from
15 Commitments of some form were made in connection with decontrol for a
total of eighteen industry sectors. See Economic Stabilization Program Quarterly
Report covering the period 1 January 1974 through 1 May 1974, chap. 2,
pp. 13-70, and "Removing Controls: The Policy of Selective Decontrol/' His
torical Working Papers on the Economic Stabilization Program, Part 2 (Wash
ington, D. C : U.S. Government Printing Office, 1974), pp. 859-948.

controls through administrative breakdown or overwhelming pres
sures from litigation or from congressional initiatives. At the same
time the continuing pinch of controls kept counterpressures against
decontrol from building.
The elements of the decontrol process are not easily summarized,
but it was oriented toward an orderly and cumulative extrication from
controls. One of its guiding principles was a general policy of decon
trolling both wages and prices in each case. The somewhat para
doxical role played by price prospects is illustrated on the one hand
by decontrol of lumber when Phase IV began because prices were
declining, and on the other by early decontrol of fertilizer in spite
of large price increases because decontrol would contribute to in
creased domestic supply. The administration's position on extension
of the stabilization authority was also designed to facilitate con
tinued decontrol while retaining enough flexibility to promote effective
dialogue among private sector interests, the Congress, and the execu
tive branch. By 30 April 1974, more than half of the portion of the
economy covered when Phase IV began had been decontrolled, with
only 12 percent of the consumer price index remaining under control
as against 44 percent before decontrol began. Congressional attitudes
had changed so markedly from the previous year that no action was
taken to provide for the limited mandatory authority requested by
the administration, or even to establish a basis for monitoring the
private sector and for analysis and policy review within the executive
branch explicitly directed toward longer-term inflation concerns.16

16 See John T. Dunlop, "Toward a Less Inflationary Society" (Remarks to the
Society of American Business Writers, San Francisco, 6 May 1974) in Economic
Stabilization Program Quarterly Report covering the period 1 January 1974
through 1 May 1974, pp. 599-607, for a discussion of areas in which federal
government initiatives could make a contribution to reducing inflation.

3
CONTROLS AND
THE ECONOMY

The effects of controls on the economy, and the effects of develop
ments in the economy on controls, can be approached from various
points of view. Each approach can give insight into some aspect of
the relation between stabilization actions and economic goals, but
regardless of the approach the insights cannot be easily summed up
to provide an overall assessment. Careful analyses using different
approaches have supported different conclusions on the influence of
controls on wages, prices, and profits during the program.1 In this
chapter, the stabilization program is examined primarily from the
point of view of overall consistency of performance with the stabili
zation rules.
General Performance of the Economy
Wage and price controls were only one component of economic policy
during the period from 1971 through 1974, and improved price
stability was one of several goals of economic policy in that period.
Controls and their administration were regarded as closely linked
with the high priority goal of a vigorous cyclical recovery in 1972.
1 See, for example, Robert J. Gordon, "The Response of Wages and Prices to the
First Two Years of Controls," Brookings Papers on Economic Activity, no. 3
(Washington, D. C.: The Brookings Institution, 1973), pp. 765-78, and William D.
Nordhaus, "The Falling Share of Profits," Brookings Papers on Economic
Activity, no. 1 (Washington, D. C.: The Brookings Institution, 1974), pp. 169-208.
See also Daniel J. B. Mitchell, "Phase II Wage Controls," Industrial and Labor
Relations Review, vol. 27 (April 1974), pp. 351-75; Michael Wachter, "Phase II,
Cost-Push Inflation and Relative Wages," American Economic Review, vol. 64
(June 1974), pp. 482-91; Edgar Feige and Douglas Pearce, "The Wage-Price Con
trol Experiment—Did It Work?" Challenge, vol. 16 (July/August 1973), pp. 40-44.

Table 3
EMPLOYMENT AND PRODUCTION CHANGES IN THE
U.S. ECONOMY, 1969-73, AND AVERAGE
FOR PRECEDING DECADE
Average
for

1959-69 1969

1970

1971

1972

1973

Employment
Total civilian
employment
(millions)

70.2

77.9

78.6

79.1

81.7

84.4

Change in
employment
(millions)

1.3

1.9

0.7

0.5

2.6

2.7

Unemployment rate
(percent)

4.8

3.5

4.9

5.9

5.6

4.9

Gross national
product

4.3

2.7

- 0 .4

3.3

6.2

5.9

Private nonfarm
output

4.5

2.8

- 0 .6

3.5

7.1

6.2

Production (percentage
change in constant
dollars)

Source: U.S. Department of Labor, Bureau of Labor Statistics, and Economic
Report of the President, 1975 (Washington, D. C.: U.S. Government Printing
Office, February 1975), p. 251.

Their influence on this goal was initially uncertain and given close
attention.2
That controls did not interfere with a resumption of strong
cyclical growth and may have contributed to it is an assertion that
needs little qualification. Real output rose by about 6 percent in
both 1972 and 1973 compared to 3.3 percent in 1971, the first year
of the recovery. Although the unemployment rate declined only
gradually throughout 1972 and 1973, increases in employment and
in the labor force were unusually large. Employment rose by more
than 2.5 million workers in 1972 and 1973 compared to an annual
average rise of 1.3 million between 1959 and 1969 (Table 3). The
2 See, for example, Milton Friedman's discussion of this question in his Newsweek
column of 8 November 1971. Reprinted in Milton Friedman, An Economist's
P rotest (Glen Ridge, New Jersey: Thomas Horton and Company, 1972), pp. 20-22.

period of rapid increase in output that extended through the first
quarter of 1973 was accompanied by strong cyclical productivity
growth, a short-term development that contributed heavily to the
favorable price, income, and profits trends of 1972 (Table 4).
Pressures of labor costs on prices were relieved by the surge in
productivity growth, permitting unusually large increases in real
earnings with a somewhat less rapid rise in wage rates than earlier.
The large increases in output were accompanied by rising profits and

Table 4
AVERAGE HOURLY EARNINGS BEFORE AND AFTER
ADJUSTMENTS FOR CONSUMER PRICE
INCREASES AND OUTPUT PER MAN-HOUR,
PRIVATE NONFARM AND MANUFACTURING SECTORS
(annual percentage change)

Average
for
1959-69 1969

1970

1971

1972

1973

Average hourly
earnings, private
nonfarm economy a
Current dollars

4.1

6.6

6.7

7.0

6.3

6.2

Adjusted for
consumer price
changes

1.2

0.7

2.6

3.0

0.0

2.6

-0 .2

0.7

4.1

4.2

2.7

Current dollars

3.7

6.0

6.2

6.6

6.2

5.8

Adjusted for
consumer price
changes

1.3

0.7

0.2

2.2

2.9

-0 .4

3.2

2.6

0.6

6.8

6.4

5.9

Output per man-hour,
private nonfarm
economy
Average hourly
earnings,
manufacturing a

Output per man-hour,
manufacturing

a Average hourly earnings for production and nonsupervisory workers adjusted
for overtime (in manufacturing only) and interindustry employment shifts. The
consumer price index was used to adjust for consumer price changes.
Source: U.S. Department of Labor, Bureau of Labor Statistics.

Table 5
PROFITS AND INCOME SHARES FOR THE CORPORATE
SECTOR AND NONFINANCIAL CORPORATIONS
Average
for
1959-69 1969

1970

1971

1972

1973

97.8

All corporations
Profits ($ billions) a

65.0

75.3

64.5

73.8

86.9

Percentage change
in profits

2.5

- 6 .2

- -14.3

14.4

17.8

12.5

Profits share b

17.4

14.2

11.8

12.6

13.4

13.6

Compensation
share b

64.9

66.4

67.4

66.5

66.4

66.9

54.8

62.9

50.9

58.3

69.3

78.2

3.9

- 8 .8

--19.1

14.6

18.9

12.8
11.4
66.4

Nonfinancial corporations
Profits
($ billions) a
Percentage change
in profits
Profits share b

15.2

12.5

9.8

10.5

11.3

Compensation
share b

64.2

65.7

66.9

66.0

65.9

a Profits and inventory valuation adjustment.
*>Share of gross product originating in sector.
Source: U.S. Department of Commerce, Social and Economic Statistics Admin
istration, Bureau of Economic Analysis.

some rise in the profits share, although the employee compensation
share remained unusually high during the cyclical expansion (Table 5).
These conditions during 1972 help to account for the degree of
public acceptance of controls at that time and for the underlying
cooperation of organized labor evidenced by the low incidence of
work stoppages.
In 1973 price increases accelerated sharply, at the outset mostly
for food, and the acceleration in inflation at the consumer level was
heavily concentrated in food throughout most of the year. A con
tinuation of relatively moderate wage increases led to a decline in real
earnings, even though labor costs per unit of output rose more rapidly
when productivity increases tapered off during 1973. Most of the
acceleration in price increases, however, can be traced to factors other
than larger increases in unit labor costs.
32

The price surge of 1973 was dominated by developments that
were largely outside of the aggregative domestic cost and price rela
tionships that have received most attention in formulating projections
of price performance. The main exogenous elements were the decline
in world food supply, the further devaluation and subsequent slide
in the value of the dollar, the strength and coincidence of the boom
in most large industrial countries, and by fall, the oil embargo and
action taken by the international cartel to raise prices. In addition,
a number of basic materials industries were operating at capacity
production levels, though this was belatedly recognized (Table 6).
While the inflation was supported by a period of rapid monetary
expansion, these developments through their influence on domestic
supply and prices had a major impact on short-term inflation. It is
possible, however, that delays in price increases induced by the
controls contributed to the persistence of overly expansionary policies
by delaying the recognition of inflationary pressures in 1972 and
early 1973.
Wages

Wage increases, as measured by adjusted average hourly earnings,
were somewhat smaller in percentage terms in 1972 and 1973 than
in the preceding four years. The decline in new first-year wage
increases under major collective bargaining agreements was much
more pronounced. In manufacturing, for example, the average in
crease declined from 10.9 percent in 1971 to 6.6 percent in 1972.
The decline in construction wage increases began in 1971, coincident
with the introduction of controls, and new first-year increases declined
from an average of 17.6 percent in 1970 to 5.0 percent in 1973. While
this shows that wages increased less rapidly under the controls than
before the controls, the extent to which the slowdown was attributable
to the controls is not clear.
Wage structural developments in the period immediately before
institution of controls had created conditions favorable for achieving
smaller wage increases by 1972. Deferred wage increases scheduled
for 1972 were somewhat lower on average than those for 1971, and
most workers with contracts expiring in 1972 had received relatively
large increases during the term of their contracts. Their position in
the wage structure compared to relative positions of other unionized
workers had not deteriorated significantly. Moreover, workers in
nonunion manufacturing establishments received smaller wage in
creases in 1970 and 1971 than those in union establishments. Thus

Table 6
CAPACITY UTILIZATION RATES
(seasonally adjusted)
Major Materials Industries

Textiles

Paper
and
pulp

Chemicals
and
petroleum

Manufacturing

Total

Durable
goods

1959-69
average
1969
1970
1971
1972
1973

86.5
78.3
75.0
78.6
83.0

85.5
90.0
86.2
85.3
89.6
93.3

80.0
87.6
83.6
78.8
84.7
91.8

88.0
90.9
87.2
87.6
91.3
93.9

79.9
89.4
85.1
76.1
82.7
91.7

87.8
87.8
82.1
84.3
89.0
94.5

91.1
95.5
91.4
92.5
96.9
96.5

86.6
90.1
86.3
86.6
90.3
93.0

1971 I
II
III
IV

74.8
75*6
74.7
74.6

86.4
87.3
83.2
84.3

85.5
85.7
69.8
74.0

86.8
87.8
88.1
88.0

85.9
85.3
64.0
69.0

82.6
84.9
85.1
84.7

91.8
91.6
93.0
93.7

85.4
87.0
87.1
86.7

1972 I
II
III
IV

75.4
77.6
79.4
81.5

87.1
88.7
90.6
92.1

80.3
82.3
86.9
89.1

89.5
90.9
91.8
93.1

76.0
79.8
85.6
89.3

86.1
89.2
88.8
91.9

96.2
96.6
97.1
97.5

88.2
90.0
91.1
92.0

1973 I
II
III
IV

82.8
83.3
83.3
82.6

92.8
92.8
94.3
93.4

90.0
88.8
94.0
94.3

93.7
94.2
94.4
93.2

88.0
87.4
94.9
96.4

94.6
94.6
94.6
94.3

96.1
95.6
98.0
96.4

92.9
93.9
93.3
91.9

1974 I
11

80.5
80.1

90.2
90.0

90.3
89.5

90.2
90.2

91.3
90.7

92.5
90.2

95.1
96.6

87.2
87.8

Source: Federal Reserve Board of Governors.

Nondurable
goods

Metals

the wages of most workers with wage agreements scheduled to expire
in 1 9 7 2 were in better balance with wages of other workers in the
economy than had been the wages of those covered by contracts
expiring in 1 9 7 0 or 1 9 7 1 . Moreover, the shift from acceleration to a
slight deceleration in consumer price increases meant that an improved
balance between wage increases and price increases had emerged after
the catch-up process that occurred in the late 1960s.
Wage structural conditions in 1 9 7 2 also pointed to the prospect
of moderate settlements in 1 9 7 3 . The collective bargaining calendar
was dominated by a few large contract situations, and the available
evidence indicated that wages under most of the largest contracts
expiring in 1 9 7 3 had increased during the term of these contracts at
least as rapidly as had the wages of the average worker. This pattern
is illustrated for three major sectors in Table 7. The lack of evidence
of deterioration in the relative wage positions of workers under con
tracts expiring in 1 9 7 3 is in striking contrast to the pattern in the
late 1 9 60 s (see Table 1 ). Moreover, the slower price increases of
1 9 7 2 permitted unusually large real wage gains for most workers,
including those with contracts expiring in 1973.
The wage situation in construction and in some other sectors
was more complex. First-year wage increases in construction, after
accelerating throughout the late 1960s, reached an average rate of
increase above 17 percent in 1 9 7 0 , and normal wage patterns within
the industry were severely disrupted. The extremely large wage
increases in construction were considered by many observers to be
creating wage structural pressures in other sectors, as workers with
comparable skills sought comparable wage increases. The disorderly
Table 7
AVERAGE HOURLY EARNINGS CHANGES, SELECTED
INDUSTRIES WITH A HIGH PROPORTION OF WORKERS
COVERED BY LONG-TERM CONTRACTS EXPIRING IN 1973
Increase in Average
Hourly Earnings
(percent)

Industry Sector

1971

1972

Private nonfarm
Rubber
Autos
Trucking

6.5
6.5
12.3
13.3

6.4
7.6
8.1
10.8

Source: U.S. Department of Labor, Bureau of Labor Statistics.

wage structural conditions that emerged, both within the construction
sector and for wages of workers in other sectors with skills similar
to those of construction workers, do not lend themselves to a simple
interpretation. They represented developments more complex than
simple restoration of a balance in relative wages that had been dis
rupted primarily through inflation. Consequently, there is no strong
basis for confidence that the pattern of leapfrogging and catch-up
would have been broken in the absence of controls. The timing and
magnitude of the decline in new wage increases in construction in
1 9 71 and 19 7 2 provide strong circumstantial evidence that a signifi
cant influence should be attributed to the controls in that sector.3
Moreover, smaller wage increases in construction under wage con
trols may have contributed indirectly to wage stabilization in other
sectors. Since construction wage levels were already relatively high,
it would have been extremely difficult to achieve smaller wage
increases in other sectors and a restoration of more normal wage
structural patterns in the absence of a sharp reduction in construction
wage increases.
For most sectors the fact that new wage increases under collective
bargaining agreements in 1 9 7 2 and 1 9 73 were smaller than those in
1 9 7 0 and 19 71 fits the pattern expected on the basis of wage structural
developments. Much of the decline in wage increases could have been
the result of factors other than the controls, although controls may
have facilitated a more rapid realization of smaller wage increases.
Wage structural developments undoubtedly contributed to the acqui
escence of organized labor in settlements with smaller wage increases
in 1 9 7 2 and 1 9 7 3 than had been obtained in other settlements. The
fact that the Pay Board approved higher wage increases in the union
than in the nonunion sector, the concentration of wage cutbacks
in the union sector, a declining differential between wage increases
for union and nonunion workers in manufacturing in 1 9 7 2 , and the
reduced dispersion in the size of new wage settlements in 1 9 7 2 and
1 9 7 3 are all consistent with the view that an important role should
be attributed to changing wage structural conditions.
Assessment of the contribution of controls to the reduction in
the size of new wage increases under collective bargaining agreements
in 1 9 7 2 and 1 9 7 3 is complicated by the influence of wage structural
3 An estimate of the impact on construction wage increases of the Construction
Industry Stabilization Committee was developed by D. Q. Mills in "Explaining
Pay Increases in Construction: 1953-1972," Industrial Relations, May 1974,
pp. 196-201. His estimate of a 2.5 percent annual effect in reducing construction
wage increases is, as he notes, sensitive to the treatment of the significant
influence of a wage structure variable incorporated into his analysis.
36

changes. In Table 8, data on the distribution of wage increases under
major agreements show a pronounced reduction in the proportion
of wage increases that exceeded 8 and 10 percent in 1972 and 1973.
Although changes in wage structural conditions provided grounds
for expecting fewer very large wage increases after 1971, wage con
trols may have helped to ensure that restoration of wage structural
balance was accompanied by a reduction in average wage increases.
It has often been suggested that setting a standard or guideline
as a ceiling for wage increases also tends to set a floor.4 The evidence
from the data in Table 8 is mixed. A larger proportion of settlements
with wage increases below 5 and 6 percent occurred during the two
years of controls than during the preceding two years. However, by
1973 wage increases were also far more heavily concentrated in the
5 to 6 percent range than they had been previously. Since the wage
standard was implemented for a period too short to assure that its
full consequences had become evident, and since little confidence
can be placed in projections of the proportion of small wage increases
that was most likely in the absence of controls, these data provide at
best only weak evidence on this issue.
Another issue that has undergone considerable debate is the
effectiveness of a simple numerical guideline or standard for wage
stabilization. The standards and computational procedures established
during Phase II were neither strongly reaffirmed nor explicitly dis
avowed in 1973; they were, however, used along with other criteria
under an approach in which the idea of a single standard applicable
to all wage situations was explicitly rejected. These data indicate,
however, that the dispersion in actual wage settlements was smaller
in 1973 and average increases were smaller, both for all industries
and within manufacturing, than in 1972. The standards were appar
ently administered more flexibly in 1972 than was generally recog
nized, and they resulted in lower average increases in 1973 than in
1972, in spite of the announced intentions to administer them with
more flexibility.

Prices
The goal of a 2 to 3 percent rate of inflation by the end of 1972 was
established when controls were introduced. This represented a con4 This argument is noted, for example, in Robert M. Solow, 'The Case against
the Case against the Guideposts/' in Guidelines, Informal Controls and the
Marketplace, ed. George P. Shultz and Robert Z. Aliber (Chicago: University
of Chicago Press, 1966), p. 45, and in a New York Times article of 1 March 1973
by Edward Cowan, entitled "U.S. Aide Outlines Tactics on Wages."

Table 8
FIRST-YEAR WAGE RATE CHANGES IN COLLECTIVE
BARGAINING AGREEMENTS COVERING 1,000 WORKERS OR MORE
Percentage of Workers Affected
All industries
Type of Wage Rate Action

1970

1971

Manufacturing

1972

1973

1970

1971

1972

1973

No wage increase

—

Increase in wages

100

Less than 4 percent

4 to 5 percent

5 to 6 percent

6 to 7 percent

7 to 8 percent

8 to 10 percent

More than 10 percent

—

Not specified
Totaf wage actions
Number of workers (000)
Mean adjustment (percent)
Median adjustment (percent)

—

100

4,675

3,978

2,424

5,320

2,184

1,913

913

2,318

11.9

11.6

7.3

5.8

8.1

10.9

6.6

5.9

5.5

7.5

10.1

6.2

5.5

10.0

12.5

Source; U.S. Department of Labor, Bureau of Labor Statistics.

6.6

siderable reduction from the 6 percent increase in consumer prices
during 1969. However, the upper range of the goal was a modest
target compared to the 3.6 percent rate of increase during the first
eight months of 1971. The belief that the goal was within reach was
bolstered by the fact that consumer prices were increasing at about
a 3 percent rate in mid-1972. More rapid increases in food prices
in late 1972, reflected most strongly in the wholesale price index,
pointed toward a temporary acceleration in consumer price inflation.
But since the acceleration was mainly limited to the farm and food
sector, the acceleration in inflation from this source could be reversed
relatively quickly by appropriately expansionary farm policies if crop
conditions were favorable.

This prospect was shattered by the size and persistence of the
farm and food price increases, along with the unexpected emergence
of tight markets and sharp price increases in several other critical
sectors. Thus the initial promise of progress toward renewed price
stability, nurtured in part by the initial apparent success of Phase II,
was followed by a surge in inflation to almost unprecedented rates in
spite of efforts to restructure the controls to contain it.
Evaluation of the influence of controls on prices is facilitated by
examining the sectoral incidence of inflation and of its acceleration
during the period. The pass-through of increased costs formed the
basis for price adjustments, and in several sectors prices of inputs
that accounted for a major share of total costs were exempt from
controls. As a result, control in these sectors was exerted only on
processing and distribution markups, and prices in these sectors could
rise dramatically under the stabilization rules in contrast to other
sectors in which most of the major inputs were domestically produced
and subject to controls. Moreover, increases in prices of major inputs
and pass-through of these increased input costs to higher product
prices were generally permitted when demand conditions in the
marketplace supported them. This approach was necessary in view
of the limited supplementary role intended for controls and the
reluctance to take complementary measures such as subsidies, ration
ing, or export controls that would have been necessary if a more
ambitious role had been assigned to controls.
During 1972, disproportionate contributions to inflation came
from the food component of the consumer price index and the farm
products and processed food and feeds component of the wholesale
price index (Table 9). Increases in wholesale industrial prices were
disproportionately concentrated in lumber and hides. In all of these
sectors, major inputs were exempt from controls. Demand pressures

Table 9
CONSUMER PRICES AND WHOLESALE PRICES BY PHASES OF THE
STABILIZATION PROGRAM: PERCENT CHANGES FOR SELECTED COMPONENTS
(seasonally adjusted compound annual rates)

1971
8 Months

Price Indexes and Components
CONSUMER PRICE INDEX
All items
Food
Meat, poultry, and fish
Nonfood commodities
Energy products
Services a
Ail items except food

1970
.1969
12 Months 12 Months
(12/69(12/6812/69) a 12/70) a

Prior to
Freeze
(12/708/71)

PostPhase 1 Phase II Phase III
3 Months 14 Months 5 Months
(11/71(1/73(8/711/73)
6/73)
11/71)

Freeze 11 Phase IV
2 Months 8 Months
(6/73(8/738/73)
4/74)

6.1
7.2
11.2
4.5
3.1
7.4
5.7

5.5
•2.2
-.6
4.8
3.6
8.2
6.5

3.6
4.7
2.2
2.6
0.7
4.5
3.4

2.0
1.3
6.6
1.0
-.7
3.1
2.3

3.7
6.7
13.0
2.5
2.4
3.5
2.8

8.3
20.8
39.6
4.6
18.3
4.3
5.0

3.8 c
0.9 c
-1 3 .5 c

4.8

2.2

4.5

2.0

6.8

21.7

7.5
8.4
6.8
3.9
3.7
4.0

-1 .4
-4 .7

5.5
7.0
4.6
3.9
4.6
-.1

6.5
6.9
5.0
1.1
3.2
2.5

14.9
20.7
11.4
3.6
21.0
5.9

50.2
75.5
38.2
10.8
-6 .0
19.1

Controls
8 Months
(4/7412/74)

11.5c
17.9 c
5.9 c
11.1
62.1
9.5
10.4

12.2
11.7
3.6
12.6
3.9
12.5
12.2

-1 3 .7 c

19.7c

19.8

- 3 4 .0 c
- 3 5 .0 c
- 3 4 .9 c

13.6c
12.4 c
14.8 c

13.8
-1 .4
25.9

3.0
2.5
5.3
3.7

WHOLESALE PRICE INDEX
All commodities
Farm products and processed foods
and feeds
Farm products
Processed foods and feeds
Industrial commodities
Hides
Fuels

0.8
3.6
.5
11.1

4.8
11.6
10.4

24.0
1.2
76.3

22.5
0.2
51.9

Lumber
Metals
sleeted stage of processing indexes
Crude materials except food
Intermediate materials except food
Consumer goods except food

-8 .3
9.8

-4 .4
2.7

29.6
6.1

2.4
1.0

12.0
3.3

46.4
10.8

-9 .6
9.5

14.0
31.4

-1 7 .7
25.2

10.6
3.8
2.9

4.7
3.2
3.9

2.1
5.8
1.9

2.6
1.0
1.1

10.8
4.0
2.4

23.9
12.9
7.0

18.2
4.8
3.6

69.1
25.8
18.6

25.4
17.8

1.1

a Not seasonally adjusted.
b Index is calculated as a weighted average of the indexes for gasoline, motor oil, fuel oil, and coal, using December 1972 weights.
cFor these components price changes are measured using July 1973 instead of August 1973 to reflect the early release from the
sixty-day freeze of food prices on 18 July 1973.
Source: U.S. Department of Labor, Bureau of Labor Statistics.

were transmitted throughout the processing and distribution chain,
a process that kept cost increases, except for costs of producing
exempt products, roughly consistent with product price increases.
In the first three quarters of 1973, food prices rose rapidly, and rapid
increases in exempt farm product prices accounted for much of their
acceleration* In the last part of the year, the contribution of petroleum
and energy prices to inflation was extraordinarily large, despite the
fact that petroleum and other energy products represented only small
components of the indexes. In both sectors, increased costs were
quickly reflected in higher consumer prices because the time spent in
the production and distribution chain is relatively short. While the
prices of both farm products and petroleum products were strongly
influenced by developments in international markets, pressure on
domestic prices came from export demand in the case of farm
products and from rising import prices in the case of petroleum
products.
The strength of demand in both domestic and foreign markets
and the devaluation of the dollar combined to support higher prices
for a widening range of basic materials. These higher prices were
initially reflected primarily in the wholesale price index. In 1973
prices of basic materials and partially processed materials, which
constituted 30 percent of the industrial component of wholesale prices,
accounted for about 75 percent of the overall increase in industrial
prices. These increased costs for processors and distributors were
reflected in the latter part of 1973 and in 1974 by price increases for
other commodities in the wholesale price index and higher consumer
prices.
There was considerable scope for price increases within the
limits of the stabilization rules at the beginning of 1973. The extent
to which the prices of commodities in the industrial component of
the wholesale price index could rise during 1972 and early 1973
before reaching levels authorized from the outset of the freeze in
August 1971 is shown in Table 10. Much of the room for price
increases was concentrated in the three sectors shown separately, and
the amount of room left was rapidly shrinking in the first part of
1973. The tabulation does not take into account, however, the addi
tional authority for price increases granted by the Price Commission
during Phase II. Many companies in each of these sectors, and most
of the major companies in the chemical industry, were authorized
under term limit pricing agreements to raise prices by an average of
42

Table 10
WHOLESALE PRICES OF INDUSTRIAL PRODUCTS BELOW
INITIAL PRICE CEILINGS: NUMBER OF ITEMS AND
PERCENTAGE IMPACT FOR SELECTED MONTHS,
DECEMBER 1971 THROUGH APRIL 1973
Industrial Commodities below
Apparent Price Ceilings

December June December
1971
1972
1972

April
1973

Wholesale industrial commodities

(73.162)a
Number of commodities
below ceilings
Impact of rise to ceilings

553
1.82

496
1.54

473
1.46

366
.90

69
.22

78
.21

69
.17

Metals and metal products (13.439)
127
Number
.74
Impact

113
.65

109
.62

68
.25

Machinery and equipment (12.280)
138
Number
.32
Impact

142
.34

141
.34

120
.26

All other components (41.627)
Number
Impact

163
.34

145
.29

109
.22

Chemicals and allied products
(5.716)
Number
Impact

219
.54

Note: Apparent initial price ceilings are defined as the highest prices of four
months: May 1970, June 1970, July 1971, and August 1971. Prices in these
months were chosen to approximate the alternate price ceilings of 25 May 1970
in the legislation and those of the base period for the freeze in the thirty days
prior to 15 August 1971. Measures of the impact of a rise in prices to apparent
initial ceiling levels are estimates of the percentage impact on the industrial com
modities component of the wholesale price index.
a Numbers in parentheses reflect relative importance in December 1971.
Source: U.S. Department Labor, Bureau of Labor Statistics.

1.8 to 2 percent above the stated levels.5 By November 1972, after
submission of prenotification requests, price increases averaging
between 3 and 4 percent had been approved covering a large propor
tion of the sales of large firms in each of these sectors. Much of the
5 For an analysis of term limit pricing agreements, see Frederic L. Laughlin,
"An Evaluation of the Price Commission's Policy of Term Limit Pricing during
Phase II of the Economic Stabilization Program" (Ph.D. diss., The George
Washington University, 1975).

acceleration in wholesale price increases in early 1973 represented
increases toward previously authorized levels.
To assess the extent to which price increases during the program
were consistent with the cost pass-through rules, cost and price trends
that occurred can be compared. Because labor costs constitute a major
share of value added, it is instructive to compare unit labor cost
increases and implicit price deflator increases for the private nonfarm
and nonfinancial corporate sectors during the period of controls.
There was an unusually close correspondence between price and unit
labor cost increases during 1972, and price increases were smaller than
unit labor cost increases in 1973.6 The close correspondence during
1972 and early 1973 is particularly striking in view of the typical
cyclical pattern, at least prior to 1968, of price increases exceeding
unit labor cost increases when demand and output increases were
large. To adjust for this cyclical influence, predicted differences for
the period beginning with the last quarter of 1971 were developed
on the basis of a regression fitted to the preceding period including
real output changes and the unemployment rate.7 The predicted
differences are compared with actual differences in Figures 4 and 5,
and the charts show substantially smaller price increases relative to
unit labor cost increases than predicted throughout the period of
controls. Those data strongly suggest that price increases conformed
more closely to unit labor cost increases under the cost pass-through
6 Figures A -l and A-2 in the Appendix show quarterly percentage changes from
the preceding year in implicit prices, unit labor costs, and their differences for the
private nonfarm and nonfinancial corporate sectors. Means and standard devia
tions for the difference between year-to-year changes in prices and unit labor
costs were as follows:
Nonfinancial
corporations

Private
nonfarm

Mean
Standard deviation
Standard deviation

(1950-73)
(1950-73)
(1971/IV1973/IV)
7 The basic data for the regressions are:
Constant
term

Private nonfarm sector
(90 observations)
R2 — .57
Nonfinancial corporations
(51 observations)

-0 .1 1
2.47
.69

Percent
change
in real
output

(1959-73)
(1959-73)
(1971/IV1973/IV)
Unemploy
ment
rate

-0 .0 6
2.45
.82

Standard
error of
estimate

—5.4

.28
.89
S.E. = (.03) S.E. = (.10)

1.08

—6.5

.30
1.01
S.E. = (.03) S.E. = (.12)

.88

jR2 = .74

Serial correlation was high with a Durbin-Watson statistic of .5 for each
regression.
44

Figure 4
CHANGES IN PRICES AND UNIT LABOR COSTS FOR NONFINANCIAL
CORPORATIONS, PREDICTED AND ACTUAL, 1959-73

Year

Note: Quarterly percentage change in prices minus percentage change in unit labor costs measured from four quarters earlier.
Source: Bureau of Labor Statistics.

Figure 5
CHANGES IN PRICES AND UNIT LABOR COSTS IN THE
PRIVATE NONFARM SECTOR, PREDICTED AND ACTUAL, 1950-73

Note: Quarterly percentage change in prices minus percentage change in unit labor costs measured from four quarters earlier.
Source: Bureau of Labor Statistics.

rules of the controls than would have been expected at that stage of
the cycle without the cost pass-through rules.
Profits
Corporate profits rose by an average of 15 percent per year from 1970
to 1973, after declining by an average of 12 percent per year from
1968 to 1970. The pretax corporate profits share rose from 11.8 per
cent in 1970 to 13.4 percent in 1972 and 13.6 percent in 1973, but
remained well below its average level of 17.4 percent during the
1960s. Profits are highly cyclical, and it is difficult to compare their
actual performance in 1971-73 with performance that would nor
mally be expected in a cyclical recovery. It is instructive, however, to
analyze the extent to which profit trends during this period were
consistent with the stabilization rules and to examine the relationship
between price and profit margin changes.
In the simplest analytic framework, the cost pass-through rules
for price adjustments suggest that percentage profit margins on sales
should remain constant with percentage cost pass-through and decline
with dollar-for-dollar pass-through of costs. This analytic frame
work, however, does not take into account possibilities for input
substitution, short-term productivity changes that differ from those
applied during the program, changes in product mix, and the effect
of increased volume on fixed costs per unit of output. Thus actual
profit margins could rise within the framework of the stabilization
regulations.
The consistency of profit performance with the stabilization
regulations is explored in Tables 11 through 13 along with the influ
ence of alternative pricing rules and short-term productivity changes
on profits and prices. The analysis is focused mainly on profits, value
added, and implicit price deflators for the nonfinancial corporate
sector, because the coverage and the procedural requirements of the
controls were concentrated on large firms and these data are readily
available. These data permit some judgments on the behavior of
costs, prices, and profits in relation to the regulations. The period over
which the analysis is made begins with the first quarter of 1971,
because price increases under the stabilization regulations could be
linked to cost increases that occurred no earlier than the beginning
of 1971.
The predominant share of the increase in profits during the entire
period from the first quarter of 1971 to the second quarter of 1974
can be attributed to the increase in the current dollar value of output

Table 11
PROFITS AND PROFIT MARGINS FOR NONFINANCIAL
CORPORATIONS: QUARTERLY AND CUMULATIVE
CHANGES FROM 1971-1 THROUGH 1974-11
Calculated Changes in Profits

Actual
Changes
in Profits

Maintenance
of constant
percentage
margin

Departure
from constant
percentage
margin

(2)

( 3)

Quarterly Profits Changes
($ billions, annual rates)

Quarterly
Periods
1971 II
ill
IV
1972 I

1.2

111
IV

IV
1973 I

1974

2.6
0.5
5.1
2.3
2.3
5.7
2.9
0.4
-0 .5

I
II

0.2

-4 .1
3.2

Cumulative
Periods
1971
1972
1973
1974

IV
IV
IV
II

Difference be
tween constant
percentage
and constant
dollar margin*
(4)

1.1
0.8
1.2
2.3
1.8
1.2
2.4
2.8
1.8
1.3
1.7
0.5
1.9

1.5
0.4
-0 .7
2.8
0.5
1.1
3.3
0.1
-1 .4
-1 .8
-1 .9
“ 4.6
1.3

0.5
0.3
0.1
0.6
0.2
0.2
0.5
0.6
0.9
0.9
1.4
2.1
2.2

nulative Profits Changes b —
($ billions)

1.1
4.9
5.6
5.4

0.8
2.7
4.6
5.2

0.3
2.3
1.0
0.2

0.2
0.6
1.5
2.6

Note: Profits are measured before taxes and include the inventory valuation
adjustment, and output is measured in terms of value added as reported in the
national income accounts.
a This increment to profits is calculated as the difference between the increase
in profits that would maintain constant percentage profit margins and the in
crease that would be sufficient only to keep profits per unit of real output
constant. It represents the amount by which profits would need to be augmented
to compensate for inflation in order to avoid a reduction in the profits share,
b Cumulative profits changes are smaller than the sum of quarterly changes by
approximately a factor of 4 because quarterly changes are expressed at annual
rates, and quarterly changes may not sum to totals of 4 times cumulative changes
because of rounding. Cumulative totals for components may differ in addition
because they were calculated on the basis of the percentage margin prevailing
in the first quarter of 1971.

Source: Computed from data from U.S. Department of Commerce, Bureau of
Economic Analysis.

during that period rather than to a rise in percentage profit margins.
Of the $5.4 billion cumulative increase in profits for nonfinancial
corporations during the second quarter of 1974 (column 1, Table 11),
$5.2 billion was required to maintain a constant percentage profit
margin (column 2, Table 11). About half of this component of profits
reflected rising prices (column 4, Table 11) with the other half
reflecting increased real output. Only a tiny fraction of the increase
in profits in this quarter was accounted for by an increase in per
centage profit margins (column 3, Table 11). Also, by the second
quarter of 1974 the profits share of gross product originating in
nonfinancial corporations was only 10.5 percent compared to an
average of 15.2 percent during the 1960s.
There was a great deal of variation in overall changes in profits
during the period, however, and in the extent to which such changes
in profits reflected changes in percentage profit margins. By the end
of 1972, wider percentage profit margins accounted for nearly as much
of the cumulative increase in profits as the increased value of output
at constant percentage margins. On the other hand, by the second
quarter of 1974 wider margins accounted for only a minute share
of the cumulative increase in profits (columns 2 and 3, Table 11).
The extent to which profits increases consistent with maintaining con
stant percentage margins reflected rising real output or rising prices
also shifted markedly during the period. The calculated increment
to profits resulting from the difference between constant percentage
and constant dollar profit margins was very small through 1972
($.6 billion out of $2.7 billion), but it increased sharply when prices
were rising more rapidly during 1973 and early 1974. By the second
quarter of 1974 half of the profits increase associated with maintaining
constant percentage margins was accounted for by higher prices
instead of by increased real output.
The difference between constant percentage and constant dollar
profit margins per unit of real output corresponds closely in concept
to the difference between price adjustments to reflect percentage pass
through or price adjustments to reflect dollar-for-dollar pass-through
of increased costs. Because these calculations (column 4, Table 11)
are based on value-added measures of real output, the calculated
difference in profits understates the impact on profits of the difference
in cost pass-through concepts. The impact of the difference between
percentage and dollar-for-dollar cost pass-through may be understated
by approximately a factor of two when the costs of materials inputs
are rising at about the same rate as costs of the value-added com
ponent of prices.

The applicability of these aggregative comparisons of percentage
and dollar-for-dollar cost pass-through is also limited by the fact that
the cost pass-through regulations were applied in different ways for
particular sectors. For example, the retail and wholesale sectors were
permitted to apply percentage markups to the cost of merchandise
throughout this period as well as in earlier stabilization programs.
In certain sectors, such as meat packing, where prices of major inputs
were highly volatile, price adjustments were permitted during the
entire period only to reflect dollar-for-dollar pass-through of major
input costs. It is difficult to be precise about the quantitative influence
of constant percentage or constant dollar profit margins, but it is
worth noting that the impact of the difference between percentage
and dollar-for-dollar cost pass-through is disproportionately large for
profit margins compared to its implications for price changes. The
increment to profits necessary to maintain constant percentage profit
margins, by reflecting the rise in prices at a given output level, ac
counted for about 50 percent of the increase in profits over the entire
period but only 1.5 percentage points of the 15 percent rise in prices
(columns 1 and 4, Table 13).
Short-term changes in output per man-hour resulted in changes
in the relationship between revenues and costs that could be reflected
in changes in profit margins within the framework of the stabilization
regulations. This source of short-term variation in profit margins was
of most importance during the stabilization program, and it is also
more readily susceptible to quantification than other possible sources
such as changes in product mix or input substitution. In reviewing
requests for price increases, short-term production and sales volume
changes were taken into account to some extent, but their influence
was small and difficult to estimate in the absence of information on
actual and expected sales volumes. Under the stabilization regula
tions, net increases in labor costs were calculated on the basis of
trend rates of increase in output per man-hour. The difference be
tween short-term output per man-hour changes and these trend rates
was used to calculate the potential influence on profits from this
source. The results are shown in Table 12 along with actual changes
in profit margins. This source more than accounts for the actual
widening of profit margins for nonfinancial corporations through
1972, and it accounts for about half of the smaller cumulative rise
in profit margins through 1973 (columns 3 and 4, Table 12). After the
first quarter of 1973, percentage profit margins declined as output per
man-hour increases fell far below trend rates.

Table 12
OUTPUT PER MAN-HOUR CHANGES AND PROFIT MARGINS
FOR NONFINANCIAL CORPORATIONS: QUARTERLY AND
CUMULATIVE CHANGES FROM 1971-1 THROUGH 1974-11
Difference between Difference
Percentage
Trend Rate and
in Rates of
Output per
Short-Term
Change in
Man-Hour
Output per
Output per
Man-Hour Man-Hour Change8 Change
(3)
(2)
(1)
Quarterly
Periods
1971 II
III
IV
1972 I
II
III
IV
1973 I
II
111
IV
1974 I
II
Cumulative
Periods
1971 IV
1972 IV
1973 IV
1974 II

Quarterly Output per
Man-Hour Measures
0.9
0.1
1.6
0.8
0.7
-0 .1
1.0
1.8
0.2
1.0
0.3
1.1
0.3
1.1
1.2
2.0
-0 .6
0.2
0.2
-0 .6
-1 .5
-0 .6
-2 .2
-1 .4
-0 .5
0.3
Cumulative Output
per Man-Hour Measures
3.2
0.8
8.3
2.6
9.9
1.0
—1.6
8.9

Change in
Percentage
Profit
Margin c
(4)

Quarterly Calculated
Increments to Profits
($ billions, annual rates)
0.3
1.5
0.4
2.9
-0 .4
-0 .7
3.8
2.8
0.5
0.9
1.2
1.1
3.3
1.2
0.1
5.0
-2 .8
-1 .4
-2 .9
-1 .8
-1 .9
-6 .7
“ 4.6
-1 0 .3
1.3
-2 .3
Cumulative Calculated
Increments to Profits e
($ billions)
0.3
0.7
2.3
2.5
1.0
0.6
0.2
-2 .5

a The trend rate of increase in output per man-hour was calculated as the com
pound quarterly rate of increase from 1958 through 1969, the period used by
the Price Commission for developing rates of productivity growth to be applied
in estimating net increases in labor costs. The trend rate for the nonfinancial
corporate sector was a 0.8 quarterly rate or a 3.2 percent annual rate.
b Increments to profits attributed to the difference between short-term and trend
rates of change in output per man-hour are calculated by applying the differential
in output per man-hour changes to the compensation share of value added in the
nonfinancial corporate sector.
c From column 3, Table 11.
d Quarterly changes may not sum to cumulative totals because of rounding.
e Cumulative increments to profits are smaller than the sum of quarterly changes
by approximately a factor of 4 because quarterly changes are expressed in terms
of annual rates for compensation and profits. Quarterly changes may not sum to
totals of 4 times cumulative changes because cumulative increments to profits
were computed on the basis of the percentage margin prevailing in the first
quarter of 1971.
Source: Computed from data from U.S. Department of Commerce, Bureau of
Economic Analysis, and Department of Labor, Bureau of Labor Statistics.

Changes in profit margins during the entire period seem to be
mainly attributable to cyclical developments, including changes in
output per man-hour, instead of to changes in the controls. The rise
in profit margins from the fourth quarter of 1971 to the first quarter
of 1972 may have been influenced by the transition to Phase II, since
prices also rose sharply, but it could also be accounted for by the
sharp rise in output per man-hour. Similarly, the decline in profit
margins in the last half of 1973 might be partly attributable to the
second freeze and dollar-for-dollar pass-through of costs in Phase IV,
but the decline had begun in the second quarter and could have been
expected to continue on the basis of larger increases in costs.
The data on profit margin changes do not support the view that
prices increased more rapidly than costs during Phase III. The acceler
ation of inflation that began in 1973 was in fact accompanied by a
sharp reduction in percentage profit margin expansion in the first
quarter when material input cost increases began accelerating. Per
centage profit margins declined after the first quarter of 1973 as
prices, unit labor costs, and other costs rose more rapidly.
Profits data on an annual basis for selected industries (Appendix
Tables A-3 through A-5) indicate that manufacturing accounted for
a major portion of profits increases in 1972 and agriculture accounted
for a major portion of profits increases in 1973. In each case much
of the increase in profits could be attributed to wider profit margins.
However, the component of profits attributable to wider profit margins
in manufacturing over the entire period, $6.9 billion, was small com
pared to the amount accounted for by large short-term productivity
increases, $12.4 billion (Table A-5). In addition, because of the large
size of the manufacturing sector, the increase in prices that was
accompanied by profit margin widening was small compared to the
increase in prices that was accompanied by profit margin widening in
agriculture. With prices of raw agricultural products exempt, almost
30 percentage points of the increase in the price deflator for agri
culture was associated with wider margins on value added, mainly
during 1973. These data also show a slight narrowing of percentage
margins for retail and wholesale trade in 1972 and 1973 even though
both sectors were formally under regulations permitting constant
percentage markups over costs.8
The profit margin data show a broad pattern of conformity with
the regulations during the period of the controls. It must be recog
8 It was pointed out by Joel Popkin in "Prices in 1972: An Analysis of Changes
during Phase II," Monthly Labor Review, vol. 96, no. 2 (February 1973)/
pp. 16-23, that prices of finished goods seemed to have risen by more at the
manufacturing level than at the retail level during 1972.

nized, of course, in using profits data to examine the consistency of
cost and price increases that there are limitations resulting from the
presence of long-term contracts, the existence of inventories, and
possibilities for hedging in purchasing and pricing policies. The
data clearly show the importance of the unusually rapid short-term
productivity gains during the early part of the period in providing
additional real income that was accrued in the form of a slowing of
price increases and a rise in profit margins. They also show that the
expansion in profit margins that occurred during 1972 was consistent
with the stabilization regulations in force, and that the acceleration in
inflation occurring in early 1973 during Phase III was not accompanied
by the wider profit margins that would be expected if business firms
were raising prices more rapidly than their costs were increasing.
The limited potential of controls as a tool to improve price
performance by squeezing profit margins is illustrated by the data on
prices in Table 13. Only a small fraction of the overall change in
prices during the period can be directly accounted for by conversion
of the components of profits changes into corresponding changes in
the value of output and prices. A major reason for the insensitivity
of prices to profit margin changes is the small fraction of the value
of output accounted for by profits. Profits accounted for less than
10 percent of output of nonfinancial corporations in 1970. The shift
in output per man-hour and profit margin trends in early 1973 reduced
the portion of the increase in prices related to change in percentage
profit margins, but the shift to more rapid inflation increased the
influence on prices of maintenance of percentage margins. Expansion
of percentage margins after the first quarter of 1971, when they were
near a cyclical as well as a historical low, accounted for less than one
percentage point of the 8.7 percent cumulative rise in prices by the
end of 1973, and only 0.3 out of 15 percent by the second quarter
of 1974. Maintenance of percentage margins, through a rise in profits
per unit of real output sufficient to compensate for the rise in output
prices, accounted for an additional percentage point by the end of
1973 and 1.5 percentage points by the second quarter of 1974. These
data show that the consequences of limiting percentage profit margins
to their cyclically low level at the beginning of 1971, or reducing
percentage margins through erosion of the profits share in real terms,
could both have significant effects on the rates of return on investment
and on cash flow available for investment in production capacity
even though price inflation in the corporate nonfinancial sector would
not have been significantly affected. Moreover, the proportionate
effect on consumer prices of a squeeze on profits would have been

Table 13
PRICES AND THEIR RELATION TO PROFITS AND OUTPUT
PER MAN-HOUR CHANGES FOR NONFINANCIAL
CORPORATIONS: QUARTERLY AND CUMULATIVE
INCREMENTS FROM 1971-1 THROUGH 1974-11

Change in
Implicit
Price
Deflator

Change in
Percentage
Profit
Margin a

Difference
in Rates of
Output per
Man-Hour
Change b

(1)

(2)

(3)

Quarterly
Percentage
Changes

Quarterly Calculated Increments to Price Change
0.8

0.2

0.1

III

0.6

0.1

0.5

0.1

-0 .1

1971 II

Difference be
tween Constant
Percentage
and Constant
Dollar Profit
Margin c
(4)

- 0 .1

0.1
0.1
0.0

1972 I

0.9

0.5

0.7

0.1

0.2

0.1

0.0

III

0.4

0.2

0.0

0.6

0.5

0.2

0.1

0.7

0.0

0.8

0.1

1.1

-0 .2

-0 .4

0.1

III

1.1

-0 .3

-0 .4

0.1

1973 I

1.8

-0 .3

-1 .0

0.2

1974 I

2.7

-0 .7

-1 .5

0.3

3.0

0.2

-0 .3

0.3

Cumulative
Percentage
Changed

Cumulative Calculated Increments to Price Change

1971 IV

1.4

0.2

0.5

1972 IV

3.7

1.5

1.7

0.4

1973 IV

8.7

0.8

*0.6

0.9

15.0

0.3

-1 .2

1.5

1974 II

0.2

a Calculations based on column 3, Table 11.
Calculations based on column 3, Table 12.
c Calculations based on column 4, Table 11.
Quarterly changes may not sum to cumulative totals because of rounding and
cumulative totals for columns 2 and 4 may differ in addition because they are
cumulated on the basis of the percentage margin prevailing in the first quarter
of 1971.
Source: Same as for Table 12.

much smaller than for prices in the corporate nonfinancial sector
during the period 1971-74, because prices of farm products and
imported commodities (which are largely external to the corporate
nonfinancial sector) were responsible for much of the acceleration in
inflation that occurred in 1973.
Profit Margin Limitations
Prices could be increased under the stabilization regulations only if
an increase in allowable costs could be demonstrated. While cost
increases were a necessary condition for price increases, they were
not a sufficient condition since limitations on profit margins were
imposed in some form throughout the program. Realized profit mar
gins as a percentage of sales were limited to levels achieved during a
base period. The limitation was applied to individual firms and
computed for the consolidated accounts of the parent firm instead
of separately by divisions, profit centers, or other accounting entities.
Base period limits for Phase II were established by computing the
average profit margin for the best two of the three fiscal years com
pleted immediately before 15 August 1971, with the inclusion of
more recently completed fiscal years permitted after Phase III began
in 1973.
Profit margin positions when the stabilization program began and
developments during the program can be illustrated in general terms
by Federal Trade Commission data for manufacturing corporations
(Table 14). These data show that profit margins in the third quarter
of 1971, when the stabilization program began, were on average
considerably below the apparent limits established by the base period.
For example, profit margins for all manufacturing averaged 8.6 percent
in 1968 and 1969 compared to 6.9 percent in the third quarter of 1971
and 7.0 percent for the year. Relative to base period limits profit
margins were then apparently highest for food and kindred products
and tobacco manufacturers, with considerable room for expansion
toward base period limits in most other sectors.
During 1972 manufacturing profit margins rose from 7.1 to
7.7 percent, remaining on average well below base period limits.
Sectors in which margins rose most markedly toward base period
limits included printing and publishing, rubber and plastics products,
and lumber. Profit margins exceeding base period limits were reported
during 1972 mainly by firms specializing in lumber production,
although this is not apparent in the aggregate data.

Cn
On

Table 14

11.2
10.7
8.5
8.5
9.3
11.7
8.5
6.5
9.6
10.3
9.0
8.5
11.3
12.6
10.9
11.9
14.1
16.5

Rubber and
miscellaneous
plastic products

12.5
12.1
10.7
10.8
11.2
12.3
11.1
10.0
11.6
11.1
11.5
10.9
12.2
12.3
12.1
12.8
14.5
15.6

'Petroleum and
coal products

7.8
9.0
8.0
7.9
8.7
8.7
8.0
9.0
6.3
8.9
9.1
10.2
7.5
8.3
9.1
9.8
7.3
9.7

Drugs

8.2
8.1
5.7
4.3
6.8
9.4
4.5
3.2
5.4
7.6
6.5
7.5
8.0
10.4
9.8
9.2
10.9
13.4

6.1
5.7
4.1
4.6
4.8
5.3
4.7
5.9
4.6
4.6
4.8
5.0
5.2
6.0
5.1
4.8
5.8
6.5

Industrial chemicals
and synthetics

11.4
10.7
11.2
11.5
11.0
11.6
12.1
11.2
11.0
11.5
11.0
10.5
10.3
10.6
10.7
15.7
15.2
18.1

Chemicals and
allied products

Paper and allied
products

4.9
4.9
4.8
4.9
4.6
4.8
5.2
4.6
4.4
4.8
4.7
4.6
4.4
4.7
4.8
5.2
4.5
4.6

Nondurable Goods

Printing and
publishing

Textile mill
products

I
Tobacco
manufactures

8.4
7.9
7.3
7.2
7.2
8.2
7.5
6.7
6.9
7.1
7.3
7.5
7.2
7.9
7.8
9.6
10.6
11.1

Food and kindred
products

8.8
8.4
6.8
7.0
7.5
8.2
6.9
6.9
7.1
7.8
7.2
7.7
7.9
8.7
7.7
8.7
8.9
9.6

Total nondurable

All Manufacturing
Corporations

Year or Quarter
1968
1969
1970
1971
1972
1973
1971 Ml
IV
1972 I
II
III
IV
1973 I
II
III
IV
1974 I
U
Base period
limit a

RELATION OF PROFITS BEFORE TAXES TO SALES, ALL MANUFACTURING
CORPORATIONS, BY INDUSTRY GROUP, 1968-74

18.6
18.5
17.2
17.0
17.8
18.6
17.4
17.5
19.0
18.1
19.1
16.9
18.6
17.5
18.8
20.0
21.0
20.8

12.0
11.7
11.0
9.5
8.5
11.1
10.2
8.1
8.3
7.1
8.7
9.7
8.4
9.6
10.5
16.6
16.6
14.5

8.3
7.0
5.1
6.6
7.4
7.2
6.5
6.8
7.3
8.0
6.9
7.3
6.9
8.2
5.8
7.7
7.9
9.8

7.6
8.5
12.3
11.0
18.6
11.8
8.2
4.9
11.3
5.9
8.2
8.6
a Estimated for each industry by computing the average percentage profit margin for the two years in which profit margins were
highest from calendar years 1968 through 1970.

Table 14 (continued)
Durable Goods
<2

J
fo t"
9.1
8.6
6.3
6.9
7.7
8.3
6.3
7.0
7.3
8.6
7.1
7.8
8.5
9.3
7.6
7.8
7.5
8.5

III
IV
1972 I
II
III
IV
1973 I
If
III
IV
1974 I
II
Base period
8.8
limit3

SJ]

a II “§
“ S
?” sS "I ">f §§
1

«§■§■ I "

1
|-®sJ3

l-s
>.11
II

H
°=

0 .(0

-I

g-5-

O -E

CO CIO

s™

—I

“

6.0
5.7
3.5
3.2
4.4
4.9
4.0
2.6
3.9
5.1
4.3
4.2
4.9
5.5
4.8
4.4
5.6
5.7

8.1
7.6
6.1
6.4
7.2
7.9
6.6
6.7
6.4
7.1
7.1
8.0
7.6
7.8
7.8
8.6
7.5
7.4

10.7
10.8
9.2
8.3
9.3
10.4
8.0
8.8
8.8
9.7
9.5
9.1
10.0
10.6
10.0
10.9
10.2
11.1

7.7
7.2
5.8
5.7
6.5
7.4
6.3
4.5
5.9
7.2
6.9
6.0
6.9
7.9
7.3
7.2
7.4
9.4

8.4
8.5
5.9
4.3
5.2
7.3
0.8
3.1
4.6
6.2
4.2
5.7
6.2
7.6
6.8
8.3
9.1
12.1

7.5
7.0
3.6
4.1
5.0
6.8
0.2
3.0
4.0
5.9
4.0
5.9
5.9
7.3
6.7
7.4
7.6
11.4

9.7
10.4
8.9
4.7
5.6
8.0
1.7
3.4
5.7
6.8
4.6
5.3
6.8
8.1
7.2
9.9
11.3
13.2

9.3
8.7
6.6
7.7
8.0
8.3
9.3
6.9
5.6
9.6
9.5
7.0
6.2
9.4
9.3
7.9
5.7
9.4

8.4
7.9
4.4
7.1
8.0
10.0
7.9
6.7
7.0
9.1
9.1
6.7
9.9
12.8
10.2
7.2

8.5

10.5

5.8

7.8

10.8

7.4

8.4

7.2

10.0

9.0

u _ CX.

C L .. _

£.=

10.9
10.1
4.0
8.7
9.1
8.6
4.8
9.8
10.4
11.2
4.0
9.7
11.3
11.2
3.8
6.8
4.2
5.7

9.1
7.8
3.8
7.1
7.6
7.3
4.7
7.7
8.3
9.4
4.1
8.0
9.5
9.4
3.8
5.9
4.6
5.9

U JU lfl

-ss

~
E -|£

I«

|<C

_____________________ ™

f— CD

1968
1969
1970
1971
1972
1973
1971

“g
£•=
Sf

;iE

|1
s^i
;?! •££ S g °

S “•

g-S

—

fS'Si i=

—

15.4
15.1
13.7
13.3
14.5
15.4
14.7
13.6
13.0
14.9
15.5
14.5
14.4
15.5
16.0
15.7
15.9
15.3

7.7
7.2
6.3
5.9
6.3
6.3
7.1
4.6
5.2
6.7
6.3
6.9
4.6
6.9
6.6
6.8
7.6
8.1

8.2

15.2

7.4

—

a Estimated for each industry by computing the average percentage profit margin for the two years in which profit margins were
highest from calendar years 1968 through 1970.
Source: Federal Trade Commission, Quarterly Financial Reports for Manufacturing Corporations, 1968-74.

Profit margins on average moved close to base period levels in
1973, particularly in nondurable goods manufacturing. Margins rose
markedly early in the year in the lumber sector (and later in the year
for several other sectors) to levels apparently above base period
limits. These profits data are not adjusted for inventory profits, in
contrast to the data from the national income accounts discussed in
the preceding section. In their treatment of inventory profits these
profits data are consistent with the computational procedures in the
stabilization regulations. There are several reasons, however, why
these aggregate data on average profit margins for industries provide
only a general indication of the degree to which realized profit margins
for individual firms were consistent with the requirements for com
pliance with the stabilization regulations.
Comparisons of base period profit margin limits for individual
firms with their realized profit margins could be significantly different
from comparisons of industry averages. Individual firms could
choose their most favorable two years, and, in addition, many firms
use fiscal years that do not correspond to calendar years. Thus the
actual difference between realized profit margins and base period
limits may have been wider than would be suggested by computations
based on industry sector averages for two calendar years. On the
other hand, the variability of profit margins for individual firms is
much larger than for the averages, and realized profit margins may
exceed base period limits for some firms even though this is not
reflected in an industry average.
The sales and profits data underlying published industry profit
margins are also more inclusive than the data specified in the stabili
zation regulations. For example, subsidiaries based abroad and mainly
engaged in foreign operations were excluded from profit margin
computations under the stabilization regulations, and the dollar de
valuations in 1971 and 1973 significantly increased reported profits
for foreign subsidiaries of international corporations. Moreover,
farming, life insurance, and public utilities operations were excluded
if they were separate accounting entities. In general the broad
definition of firms applied under the stabilization regulations also
obscures comparisons with data based on different definitions.
Realized profit margins could in addition, under certain condi
tions, exceed base period profit margin limits without violating the
stabilization regulations. During Phase II, profit margin limitations
were not applied to firms that raised no prices above base period
levels (prices charged in the thirty days before 15 August 1971 or on
25 May 1970). During Phase III, profit margin limits were not applied
58

unless the firm increased prices by at least an average of 1.5 percent
above levels authorized on 10 January 1973, and during Phase IV
they were not applied to firms that increased no prices above levels
legally prevailing during the mid-1973 freeze. A significant fraction
of firms raised no prices above base period levels during 1972, and in
late 1973 sales and profits attributable to exempt prices in areas such
as exports, lumber, and other sectors exempted later could be ex
cluded from profit margin computations. Firms that had increased
prices, but later reduced them sufficiently to compensate for the
revenue received from these price increases, were also relieved from
profit margin limits. In addition, relief from profit margin limitations
or adjustments to base period limits were often granted through the
exceptions process. Relief of this sort reflected well-documented
special circumstances experienced by a firm, circumstances such as
a major change in the financial structure of the firm. The special rules
applicable to firms experiencing losses or very low profits could also
raise average profit margins without placing the firms at the lowprofit end of the distribution in violation of the regulations. It may
be concluded that the published aggregate profit margin data cannot
be easily translated into evidence on the extent of compliance with
the profit margin limits under the stabilization rules.
Beginning in the second quarter of 1972, orders to reduce prices
and (when this was possible) to make refunds were issued to firms
with profit margins exceeding base period levels. Occasionally there
were denials of requests for price increases from firms approaching
base period profit margin limits, with the most noteworthy cases
being those for two major auto companies in late 1972. By the end
of 1972, only a small number of firms showed profit margins in excess
of base period limits, and they were heavily concentrated in the
lumber and construction sectors. In the construction sector, the
immediate linkage between profit margins and pricing was weak, and
special procedures were eventually developed for construction. In
other sectors remedial actions included refunds where feasible, price
reductions where markets would not be unduly disrupted, or pay
ments to the Treasury to reflect profit margin overages. In many
instances the presence of special circumstances that had not been
dealt with through the exceptions process led to negotiation of com
promise settlements of profit margin overage problems.
The marked acceleration of price increases in early 1973 and the
large increases in reported profits for the first quarter of 1973 led
many observers to conclude that there was widespread noncompliance

with cost-justification and profit margin regulations.9 Yet reports on
prices, costs, and profits for the first part of the year showed few
instances of probable violation of the stabilization regulations.10 In
addition, since cumulative profit margins in these reports in most
instances did not reflect results for a completed fiscal year, many of
the apparent profit margin overages may have been attributable to
seasonal factors.
Profit margin limits were applied throughout the remainder of
the program, with remedies prescribed when base period limits were
exceeded and denial of requests for price increases when firms were
approaching base period limits. However, the sector-by-sector de
control process during Phase IV complicated the application of profit
margin limits, because exempted activities could be excluded from
profit margin computations. Often only crude adjustments could be
made by firms with production operations in several sectors, some of
which were exempted, and application of profit margin comparisons
became increasingly arbitrary and complicated during the decontrol
process.

0 Lack of compliance was usually implied, though not explicitly alleged, in calls
for stricter controls or a return to controls similar to those of Phase II. New
York Times editorials calling for stricter controls appeared on average more than
twice a month between February and June 1973, usually immediately after
wholesale and consumer price increases were announced. The Business Week
editorial of 10 March 1973 called for a shift from "voluntary" to mandatory
rules, better enforcement, and farm product price ceilings. Gardner Ackley in
"And Now Phase Four" (Dun's, August’ 1973, p. 11) said that Phase III had
"allowed large numbers of firms in many leading industries to violate the profit
margin limitations."
10 A preliminary review of reports covering the first four months of 1973
showed only 3 firms out of nearly 500 without adequate cost increases to support
the increased revenues they had received from price increases. An internal
analysis of eight industry sectors also showed price increases averaging signifi
cantly less than cost increases that had accumulated, both during the first four
months of the year and by June when the freeze was imposed. By 12 July over
900 reports on costs and profits had been received from firms with annual sales of
over $250 million. According to nearly 500 reports from nonfood firms that had
been reviewed, price increases averaged less than 1.5 percent above levels
authorized when Phase III began for about 450 firms and only 6 firms that
had increased prices by more than 1.5 percent with profit margins exceeding
base period levels. In the food sector only 7 out of almost 150 firms showed
profit margins exceeding base period levels.

4
SECTORAL DEVELOPMENTS

During the period from 1 9 7 1 through 1 9 7 4 the contribution of indi
vidual sectors to inflation was highly uneven. Of course, differences
in sectoral contributions to inflation reflect constantly occurring
changes in relative prices for particular products and services, but
differences in rates of price increase for broad classes of related
products were unusually large during the last eighteen months of the
controls period.
Public attention would normally be focused on sectors in which
prices rose most rapidly, but the focus of public attention on food
prices may have been intensified by a program of controls which was
widely regarded as responsible for preventing large price increases,
irrespective of developments in the marketplace. Even if they did
little to increase public sensitivity to rising prices, the controls did
provide a focal point toward which public dissatisfaction could be
directed. Controls policies were to a large extent shaped in reaction
to public and congressional pressures and in response to changes in
market conditions. Consequently, review of developments in the
sectors where these pressures and changes in market conditions were
most important should highlight changes in controls and their effects,
and sharpen our perception of the dilemma of dealing with a sup
posed need for aggressive use of controls despite the risk that stringent
controls would disrupt markets, attenuate the allocative role of prices,
and undermine efficiency.
Food
Food price performance has typically been characterized by relatively
large short-term swings. Since food accounts for about one-fourth of

the consumer's budget (as represented by the consumer price index)
and food purchases require regular and frequent cash outlays that
are not readily postponed, food prices have often been viewed as a
sensitive barometer of consumers' perceptions of inflation. Thus,
while food price increases were controversial from the beginning of
the program, the unusually sharp rise in food prices during 1973,
when they accounted for more than half of the overall rise in con
sumer prices, swept away the conditions necessary for the mainte
nance of a fragile balance between public acquiescence under flexible
controls and developments in the marketplace consistent with sustain
ing this flexible approach.
Consumers judged controls to be ineffective because of the per
formance of food prices during the phases of controls in which rigid
price ceilings were not in effect. Yet when the market disruption and
adverse effects on supply that resulted from rigid ceilings became
apparent, mainly as a result of meat price ceilings and the freeze in
1973, they contributed toward a reversal of public attitudes toward
controls and to the ultimate dismantling of the program.
Background. During 1972 the food price problem at the consumer
level was largely confined to meat. By 1973, however, the problem
had spread to many other food products, and the overall cost level of
much of the food production sector was lifted by massive grain and
soybean price increases. The full effects of these developments did
not become evident until later in 1973, when a combination of strong
consumer demand and reduced world supplies resulted in an unprece
dented surge in food prices.
Farm po licy and production: 1971-72 . A food price problem was
not apparent during the 1971-72 crop year. After a decline in farm
output in 1970 (primarily from corn blight), farm programs were
liberalized significantly to reduce acreage diversion in 1971. Favorable
weather also contributed to the 11 percent rise in crop output from
the previous season's depressed level. World grain stocks by the end
of the crop year rose by 15 percent (about 17 million metric tons) to
a level of 147.7 million metric tons. Abundant supplies led to a
decline in grain prices by late 1971. A sharp rise in meat and animal
protein supplies, which was partly a result of the liquidation phase of
the hog cycle that had peaked in late 1970 when corn prices were
high (because of the blight-damaged crop), contributed to a tem
porary stability in meat prices.
The buildup of U.S. and world grain stocks in the fall of 1971
led to declining prices for corn and wheat, and strong farm and
62

congressional pressures for a policy response. In the fall of 1971 the
administration encouraged expanded acreage diversion under the
wheat and feed grain programs, and diverted acres rose from
37.6 million in 1971 to 62.1 million in 1972. Of course 1972 was an
election year, but even so, policy makers did not foresee the decline
in world grain production in 1972 accompanying the programmed
reduction in U.S. grain output.
W o rld grain developments: 1972-73. A reduction in world grain
output and the impact of this reduction on international markets
was the major short-term force underlying the food price explosion
in 1973. With reduced acreage offsetting some of the gain in yields,
U.S. crop output increased by less than one percent in 1972. Adverse
weather conditions, however, significantly reduced crops in the Union
of Soviet Socialist Republics, China, India, Eastern Europe, Australia
and Argentina. World output of wheat and coarse grains dropped
3 percent below the previous year's level and also fell below trend
(Table 15). Although beginning stocks were higher than the previous
year, markets were tight and prices soared.1
New developments on the demand side contributed to unusual
pressure on world grain markets. The Soviet Union entered the U.S.
grain market to compensate more fully for its reduced harvest than
had been done previously,2 and the People's Republic of China
entered the U.S. grain market for the first time in many years to
supplement their reduced crops.
The size of Soviet purchases in U.S. and world markets was not
only unusually large, but the manner in which these sales were
handled may also have contributed to the price effects of the pur
chases. In early July 1972 an agreement had been reached between
the United States and the Union of Soviet Socialist Republics calling
1 Rice production fell 5 percent from the 1971 level# with the declines concen
trated in the Asian countries. A wet fall in the United States delayed harvests
and particularly reduced the soybean crop, and a ban on anchovy fishing in Peru
reduced fishmeal production, cutting world high-protein meal supplies by 2 per
cent for 1972. By December 1972 the U.S. farm price for wheat, which for years
had been artificially supported above world levels, had risen to $2.38 per bushel
compared to $1.32 in the previous July and $1.34 in December 1971. Prices of
soybean meal rose to an average of $174 per ton compared to $81 in late 1971.
2 Substantial declines in grain output in the Soviet Union had not been un
common in the past. Wheat production in the decade of the 1960s had declined
in four separate years, with the magnitudes of the drops exceeding the 1972
shortfall in absolute and relative terms. In 1963-64 when the U.S.S.R. experi
enced its sharpest decline in wheat production, consumption was curtailed
severely and livestock herds were slaughtered to supplement diets. But in 1972
the U.S.S.R. purchased over 20 million metric tons of wheat and feed grains
compared with 7.7 million tons in the previous season (13.7 million tons were
purchased from the U.S. in 1972-73 and 7.9 million in 1973-74).

Table 15
TOTAL WORLD GRAIN SUPPLY-DISTRIBUTION, MARKETING
YEARS 1960-61 THROUGH 1974-76
Area
Harvested
(million
Marketing
Year
hectares)
1960-61
1961-62
1962-63
1963-64
1964-65
1965-66
1966-67
1967-68
1968-69
1969-70
1970-71
1971-72
1972-73
1973-74
1974-75d
1975-76«

473.5
465.7
469.0
475.0
481.9
477.1
477.5
485.4
491.4
487.1
476.5
484.2
481.3
500.6
506.8
515.6

Yield
(quintals
per
hectare)

Beginning
Stocks8
(million
metric
tons)

Produc
tion
(million
metric
tons)

13.9
13.4
14.4
14.0
14.6
14.9
16.4
16.3
16.9
17.1
17.5
19.0
18.7
19.5
18.2
18.2

164.0
176.7
150.0
153.2
148.0
151.3
115.6
144.6
159.4
188.1
168.2
130.5
147.7
108.1
110.3
103.0

656.5
623.7
673.7
664.1
703.5
709.2
782.1
791.5
829.5
832.1
832.7
920.0
899.3
976.6
921.0
938.4

Total Consumption
Total e
Exports b
(million
(million
metric
metric
tons)
tons)
69.9
81.5
78.5
94.9
92.2
109.0
102.4
98.1
91.7
102.4
109.6
114.1
141.4
150.3
138.0
154.7

643.8
650.4
670.5
669.3
700.2
744.9
753.1
776.7
800.8
852.0
870.4
902.8
938.9
974.7
928.3
942.6

Note: Includes wheat, rye, barley, oats, corn, and sorghum.
® Stocks data are based on an aggregate of differing local marketing years and
should not be construed as representing world stock levels at a fixed point in
time. Stocks data are not available for all countries and exclude such as the
People’s Republic of China and parts of Eastern Europe; the world stock levels
have been adjusted for estimated year-to-year changes in U.S.S.R. grain stocks,
but do not purport to include the entire absolute level of U.S.S.R. stocks.
Trade data are based on an aggregate of differing local marketing years,
c For countries for which stocks data are not available (excluding the U.S.S.R.),
consumption estimates represent “apparent” consumption, i.e., they are inclusive
of annual stock level adjustments.
«* Preliminary.
• Projection.
Source: U.S. Department of Agriculture, Foreign Agricultural Service.

for the Soviet Union to purchase $750 million of wheat and grain
over a three-year period*3 In early July Soviet buyers began negoti
ating with major private U.S. firms for wheat and feed grains and
3 For a more complete discussion of the dramatic 1972-73 grain and oilseed events,
see the August 1973 editions of the Feed Situation and Wheat Situation and the
October 1973 edition of the Fats and Oils Situation, Economic Research Service,
U.S. Department of Agriculture. See also Milling & Baking News, 23 October
1973.

additional large orders were placed through the fall as the deterioration
in Soviet crops continued.
At the same time, even though world supply of grains was
tightening, the U.S. Department of Agriculture continued to subsidize
wheat exports in the traditional manner in an effort to stabilize world
prices at about $1.65 per bushel. This policy continued while the
price of wheat in the United States rose from about $1.50 to over
$2.20.4 The subsidy was increased from 2 cents per bushel to 47 cents
before it was suspended completely in late September 1972. The
continuation of the subsidy until September probably reflects the
inertia of traditional practices of supporting U.S. wheat prices above
world market levels and lack of recognition that radically new market
conditions were emerging.
Cyclically strong demand also contributed to price pressures in
U.S. and world markets for grains and animal proteins, in addition
to normal demand growth attributable to population and income
trends. The economies of the United States and the other major
industrial countries were in a phase of strong cyclical expansion in
late 1972 and early 1973. Real per capita disposable income in the
United States rose exceptionally rapidly during that period (Table 16).
While the expanded income growth on the surface might not appear
to have been an important contributing factor, income elasticities
are particularly high for red meats and therefore translate into
enlarged derived demands for grain and oilseed for livestock feeds.5
The cyclical surge in income placed an additional increment to demand
on top of trend growth rates for grains of about 1.5 percent in the
developed countries and 0.4 percent in the less developed countries.
Another factor that translated price pressures in world markets
into unusually large price increases in the United States was the
devaluation of the dollar in February 1973—the second devaluation
in about a year and a half. This devaluation and further decline in
the value of the dollar raised prices more in the United States than
for foreign buyers seeking U.S. commodities in 1973.
The stabilization controls were administered in a context shaped
by developments in world grain and animal protein markets. While
numerous factors contributed to tight markets and extraordinary price
increases, three were of particular importance: the Soviet wheat sale,
the reduction in world grain stocks, and the relationship between
4 Cash prices for # 1 hard red winter wheat in Kansas City quoted in Crain
Market News, weekly publication of Agricultural Marketing Service, Grain Divi
sion, U.S. Department of Agriculture.
5 See Dale Hathaway, "Food Prices and Inflation/' Brookings Papers on Economic
Activity, no. 1 (Washington, D. C.: The Brookings Institution, 1974), pp. 63-116.

Table 16
DISPOSABLE INCOME PER CAPITA IN THE UNITED STATES:
QUARTERLY AND ANNUAL PERCENTAGE CHANGES IN
CURRENT AND CONSTANT DOLLARS, 1971-74

Percentage Change of Per Capita Disposable Income
(seasonally adjusted annual rate)

Year

1971
1972
1973
1974

12.9
7.0
15.1
4.1

8.4
7.4
10.1
6.2

III

Year

3.3
5.2
10.8
5.5

7.1
6.6
11.8
7.6

2.1
12.0
0.0
-1 .3

3.1
3.6
6.0
3.4

ourrem uoiiars *

3.4
8.0
9.3
10.6

H
ftCQ uoiiars
iy&o
1971
1972
1973
1974

8.4
3.1
9.7
2.2

4.1
4.5
1.4
-1 .3

.3
5.2
1.5
—.3

Source: Economic Report of the President, 1975 (Washington, D. C.: U.S. Govern
ment Printing Office, 1975), p. 269, and Economic Report of the President, 1974,
p. 269.

Table 17
RATIOS OF LIVESTOCK PRICES TO CORN PRICES:
SELECTED YEARS, 1967-73

Price Ratios

1967-718

1972=

1973a

Hog/corn

17.5

22.4

13.5

Beef-steer/corn

22.8

24.8

15.4

a Based on average prices for years beginning with previous October.
Source: U.S. Department of Agriculture, Livestock and Meat Statistics, Statistical
Bulletin Number 522, July 1973, and Supplement for 1973, June 1974.

prices for grain and livestock. The Soviet wheat sale was only one
element and would by itself have generated much smaller price in
creases than those that occurred, despite the inelastic demand for
grains. Moreover, the Soviet purchases might have been substantially
reduced if the subsidy program had not operated to the purchaser's
benefit and if timely information on the extent of the purchases had
been available. Second, the reduction in world grain stocks from
66

148 million tons at the beginning of 1972-73 to 108 million tons at
the end of the season (Table 15) was the primary element contributing
to higher grain prices. Soviet purchases amounted to over 20 million
tons, with over half that amount purchased in the U.S. market.
Third, the higher grain prices, which were also highly volatile in the
absence of large buffer stocks, were translated into higher feed
ingredient costs. Demand for meat was strong enough to support
large price increases for livestock, and restoration of balance between
livestock prices and feed costs required a large increase in livestock
prices. The effect of the surge in grain prices on this balance is shown
by the changes in livestock/feed price ratios from the 1967-71 period
to ratios prevailing in 1972 and 1973 (Table 17). The change in these
ratios by 1973 set the stage for the price-cost squeeze experienced by
livestock producers in 1974.6
Food Prices and Controls Policies. Changes in retail food prices
under the controls were closely linked with developments in markets
for farm and food products, because limits were generally placed on
processing and distribution margins instead of on food price levels.
Little influence could, therefore, be exercised over food prices unless
changes could be effected in domestic supply or demand in farm and
food markets or unless controls were extended beyond limitations on
margins. There was some use of both approaches during the stabili
zation program, but in view of other goals, only limited and temporary
relief from food price increases was possible through more stringent
controls.
Food prices through Phase II. The freeze in August 1971 pro
duced few market dislocations, partly because seasonal declines in
food prices normally occur at that time. Food price ceilings were not
binding in most instances, and retail food prices declined slightly in
September and October. Prices for unprocessed foods, which are
more volatile than other food prices, were not subject to the freeze,
and the regulations provided flexibility for seasonal price changes.
Most of the problems that arose during Phase I resulted from adjust
ments in mandatory support prices under federal programs—such as
those for peanuts, sugar, and dairy products—that forced cost
absorption at processing and distribution stages.
Food prices, led by meat price increases, rose more rapidly in
Phase II than did other consumer prices. Retail prices of meat, poultry,
and fish rose at a 13.0 percent rate from November 1971 to January
6 For a more detailed discussion of food price developments in 1973 and 1974,
see D. Gale Johnson, World Food Problems and Prospects (Washington, D.C.:
American Enterprise Institute, 1975), chap. 3, pp. 21-34.

1973, with the overall increase occurring in short-lived but sharp
rises that generated intense concern on the part of the public and
corresponding reactions by policy makers. In mid-1972, for example/
when there was an increase in retail meat prices, the Price Commission
was subjected to intense public criticism on the effectiveness of
Phase II. There were demands for the extension of controls to raw
agricultural products and the imposition of ceilings on meat prices.
A wide range of possible modifications of food price controls was
considered in mid-1972. The main actions taken were a temporary
suspension of meat import quotas in June following liberalization
earlier in the year, and the extension of controls to distribution
margins for eggs and fresh fruits and vegetables. The suspension of
meat import quotas was the first dear significant action taken to
increase supply in response to Cost of Living Council efforts to
stabilize food prices. It was an action taken to improve the market
environment for controls and thus help to maintain their credibility,
and it was followed by numerous actions with a similar purpose later
in the program. In this instance, as in others, the action was accom
panied by other steps taken to demonstrate governmental concern—
in this case including a renewed intensification of compliance auditing
and enforcement activities.
Phase III and supply emphasis. The outlook for farm and food
prices at the beginning of 1973 was that they would be under strong
upward pressure until mid-year when livestock supplies were expected
to expand and the new harvests would be brought in. Given the
prospect of a disturbing rise in food prices early in the year, the
council's view was that public apprehensiveness about a new phase
of the stabilization program, with a significant easing of controls for
most sectors, could be mitigated by a tough and visible approach to
stabilization of food prices.7 This view formed the background for
the decision to retain mandatory (though slightly modified) controls
in the food sector, along with procedures for policy review within the
federal government to find ways to expand domestic food supplies.
At the same time the procedural requirements of the controls were
relaxed for most of the rest of the economy. When Phase III was
introduced on 11 January 1973, a number of supply actions were
announced that were designed to augment food supplies and enhance
public awareness of underlying market conditions.8
7 See comments on this question by George P. Shultz in Hearings on S. 398,

pp. 17, 18, and 32.

8 See Economic Report of the President, 1974 (February 1974), Table 24, p. 95,
for a list of these actions.

The supply actions taken in January were expected to make a
marginal contribution to stabilizing the rise in farm prices that had
been building up in the closing months of 1972 and to demonstrate
that the government was taking action to stabilize market conditions.
However, in subsequent months of 1973 farm product prices surged
upward along with prices for many other commodities. Food grain
prices in January were already 72 percent above January 1972 levels.
During the spring, prospects for larger supplies later in 1973 were
expected to be sufficient to blunt the rise in farm and food prices.9
But by mid-1973 it had become increasingly evident that supplydemand conditions were far tighter than had earlier been expected.
There was a clearer recognition by that time that a combination of
short world supplies, strong international demand, and a decline in
the foreign exchange value of the dollar were contributing strongly
to the most explosive increase in domestic food prices since World
War II.10
Meat ceilings. Livestock supplies fell sharply in the opening
months of 1973, with beef dropping slightly and pork declining nearly
two pounds per person from early 1972 rates. Consumer demand was
strong, with the large income increases shown in Table 16 supporting
an increase in retail beef prices of 18 percent from December to
March (an annual rate of more than 90 percent).
Unable or unwilling to distinguish between the voluntary con
trols on nonfood commodities and continued mandatory control on
food, the public and Congress blamed much of the price explosion on
Phase III. Considerable pressure developed in Congress and eventu
ally within the administration to "do something" to stop the rise in
food prices, and particularly meat prices. But with per capita meat
supplies in the first quarter down 4 percent from the corresponding
period in 1972 and with similar reductions in poultry and egg sup
plies, tighter controls were a risky venture in the face of what was
becoming evident— an unusually tight supply situation and continued
strong demand despite consumer efforts to organize meat boycotts.
With prospects for livestock supplies expected to pick up in the
&See "Food Prices/' a report prepared by the Cost of Living Council Committee
on Food and released on 20 March 1973, contained in the appendix to the Eco
nomic Stabilization Program Quarterly Report covering the period 11 January
1973 through 31 March 1973, pp. 69-76.
10 This recognition is reflected, for example, in Secretary Shultz's statements in a
White House press briefing on 18 July 1973. He made reference to a bulge in
price increases after the freeze reflecting the buildup of costs in the system and
declined to make any estimate of food price increases after the f r e e z e . "Transcript
of a White House Press Briefing," Phase IV Announcement, Economic Stabiliza
tion Program, Cost of Living Council, Washington, D. C., 19 July 1973, pp. 31-36.

second and third quarters of 1973 on the basis of available estimates,
the administration on 29 March 1973 imposed ceiling prices on
red meats.
The meat ceilings stopped the rise in retail beef prices, but there
were other developments. Farmers curtailed marketings sharply in
response to the ceilings and consumer boycott reports (Figures 6
and 7). Second quarter total per capita meat supplies dropped 6 per
cent from the first quarter and 9 percent from the corresponding
April-June period in 1972. Per capita supplies of beef during the
second quarter also dropped 9 percent from a year earlier. Actual
marketing trends were in sharp contrast to a report of 1 April that
indicated cattle feeders planned during April-June to expand market
ings out of feedlots by 3 percent above the marketings a year earlier.11
Not only did cattle feeders and hog farmers cut back their
marketings severely, but the ceilings squeezed packer margins causing
many small plants to curtail or close operations. By August many
retail chains, unable to obtain sufficient meat supplies to meet con
sumer wants at ceiling prices, contracted directly for custom slaughter
ing in order to accommodate demand. This maneuver, along with
producer efforts to hold back on marketings through traditional
channels, pushed up prices of live animals.
Freeze II and its effects. Despite administration efforts to tighten
Phase III by placing ceilings on meat prices and more stringent rules
on large nonfood firms, pressures mounted in the Congress for still
further action.12 Although ceilings on red meat prices had held live
stock product prices at the farm level reasonably stable in the second
quarter, rising world demand for grains and high-protein food, as well
as tighter domestic supplies of fruits, vegetables, and cotton, con
tributed to further rises in the average level of farm commodity prices.
By mid-June, the overall level of farm product prices was up 19 per
cent from the January 1973 level, and 38 percent from prices of the
previous June. Retail food prices in June were 8.8 percent higher
(unadjusted) than they were in January 1973 and 13.7 percent higher
than in June 1972.
With prices sharply higher, there was rising public enthusiasm
for another freeze regardless of economic conditions. Although it
was not clear to the public, by late spring the market situation in the
food and agricultural sector had become substantially tighter than
11 U.S. Department of Agriculture, Cattle on Feed, April 1973.
12 The unanimous vote by the Senate Democratic Caucus on 5 June 1973 to
introduce legislation to impose a comprehensive ninety-day freeze and state
ments in favor of a freeze by powerful congressional Democrats indicate the
intensity these pressures had reached.
70

Figure 6
S LA U G H TE R R A TE S FO R C A T T L E AND HOGS, 1972 AND 1973
Cattle Slaughter

Thous. head

oan.

reo.

Mar.

Apr.

May

June

July Aug.

aepi. vci.

nuv.

uc.

a Price ceilings on beef were continued when the freeze was lifted for the rest of
the food industry by Stage A of Phase IV.
Note: Events noted in italics occurred in 1973.
Source: U.S. Department of Agriculture, Livestock Division, Agricultural Market
ing Service.

Figure 7
PRICES FO R C A T T L E AND HOGS, 1972 AN D 1973
Price of Choice Steers3— Omaha

Price of Barrows and Gilts— Omaha

a Steers sold out of first hands for slaughter. Weighted averages,
b Price ceilings on beef were continued when the freeze was lifted for the rest
of the food industry by Stage A of Phase IV.
Note: Events noted in italics occurred in 1973.
Source: U.S. Department of Agriculture, Livestock Division, Agricultural Market
ing Service.

had been expected. Not only were livestock producers withholding
marketings because of the meat ceilings, but the summer harvests
had not yet begun. Moreover, consumer demand was running very
strong. On an annual rate basis, per capita aftertax income gains in
the first half of 1973 were more than double the 1972 income gain.
These conditions gave rise to the possibility that supply curtailment,
particularly in the food sector, might become so severe that wide
spread shortages and flagrant violations could force a premature end
to a freeze. The momentum of public and congressional pressures,
however, was not diminished by the possibility that an early retreat
might be necessary. Thus on 13 June 1973, "Freeze II" was instituted.
Its announced objective was to allow time for developing Phase IV,
which was to be a system of flexible but "tough" controls.
Market disruptions during the second freeze exceeded the expec
tations of the public if not of economists.13 Its timing was inopportune
for agricultural commodities because prices generally are higher on
average in July through September than in June as a result of seasonal
variation in supplies. The second freeze came two months earlier in
the year than Phase I, which had been instituted on 15 August. For
many crops, harvest had not yet begun when the second freeze was
imposed. Consequently, when new production came to market during
the freeze, many processors, wholesalers and retailers were forced to
sell at prices that were in effect during the first week in June—prices
which in many cases reflected market conditions in the previous
season. Moreover, firms could not pass on higher production costs
they had incurred, and many were forced to sell at prices much below
costs and market clearing levels. Shortages that appeared for particular
products led some consumers to believe that food supplies were
dangerously low. Newspaper articles warned of possible food short
ages.14 Support for the freeze dissolved quickly. Congress soon reversed
itself; the Senate Agricultural Committee held a number of informal
hearings on the severity of the market disruptions, and several bills
were introduced to ease or remove controls from food prices.10
13 One reason why the freeze of June 1973 led to a great deal more market
disruption than did the freeze of August 1971 was the change in regulations
dealing with raw agricultural products. During the first freeze ceiling prices were
not applied to unprocessed food products, including such products as eggs and
fresh fruits and vegetables, but ceilings were applied to those products after their
first sale during the second freeze since controls had been applied to distribution
margins for these products in June 1972.
14 See, for example, John A. Prestbo, "Bare Cupboards/' Wall Street Journal,
28 June 1973, p. 1.
15 See "Congress and Controls," Appendix C, section 5, Historical Working
Papers on the Economic Stabilization Program, Part 1, pp. 226-28.

Because of the market developments and public pressure, the
administration instituted "Stage A " of Phase IV for the food industry
on 18 July. This "Stage A " allowed food processors, wholesalers, and
retailers to adjust prices to reflect dollar-for-dollar increases in raw
product costs since the first part of June in order to avoid a severe
squeeze on profits in food processing and marketing firms. The price
increases that followed during "Stage A " were extraordinarily large.
In August farm commodity prices jumped an unprecedented 20 per
cent. Although the upsurge was short-lived, the results of the price
pressures had some lasting effects, particularly in the U.S. livestock
industry. With prices straining against ceiling levels because of
reduced crop supplies and withholding of marketing by producers,
consumer demand during and immediately after the freeze apparently
shifted sharply upward. Consumers were apparently willing to pay
higher prices for food as a result of fears of diminished food supplies
aroused by the new disequilibrium that the freeze had created. Price
levels of virtually all raw commodities surged to simultaneous peaks
in August but fell off dramatically later in the month as demand
became satisfied at new price levels (Figure 7 and Figure A-3 in the
Appendix).
Although prices rose to much higher levels during the month,
hog prices in August averaged over $56, choice steers at Omaha nearly
$53, and feeder calves more than $72. Livestock prices consistent
with ceiling prices were estimated at about $35, $45, and $53 for hogs,
steers, and feeder calves, respectively. Prices for feeder calves, in
particular, were bid to unwarranted levels, committing many livestock
feeders to cost levels that turned their operations unprofitable once
marketings picked up and put downward pressure on product prices.
A major factor in the increase in livestock prices was the admin
istration's decision not to lift the ceilings on beef prices at the time
the freeze was removed for all other food items. This caused a sharp
cutback in cattle marketing and placed additional demands on com
peting meat supplies, adding impetus to upward price pressures.
Moreover, the decision not to release beef made consumers and
producers uncertain as to prices that might be sustained in the
absence of ceilings. A significant decline in prices occurred during
September once the ceilings on beef were removed and marketings
picked up. One conclusion that can be drawn from this period is
that these sharp fluctuations in supplies and prices raised the risk
to producers and contributed to future instability, some of which
became evident in the livestock industry in 1974. Cattle feeders and
turkey and broiler producers suffered substantial losses in 1974
74

because of earlier overcommitments on input costs followed by sales
during a period of expanding supplies, declining prices, and lower
consumer demand. In the aftermath of the earlier disruptions of the
industry, one result was the passage of the guaranteed credit program
for livestock producers in the summer of 1974.
Meat ceilings and exports. The meat ceilings were quickly
blamed for an increase in meat exports. Beginning in March 1973
exports of pork, particularly to Japan, rose dramatically. While this
led to allegations that ceilings were the prime cause and speculation
that domestic supplies would become more seriously affected, the data
suggest that other factors were also operative. The acceleration
appears to have started in March 19 73 , following the second devalua
tion of the dollar, but before the announcement of the meat ceilings
(Appendix Table A-6). The surge in exports of pork dissipated in
June, a month before the ceilings on pork prices were removed.
Exports to Canada also rose during this period, possibly to replenish
Canadian shipments to Japan. Thus while pork exports were high
during much of the period when ceilings were in effect, the extent to
which the rise should be attributed to exempt export sales with
domestic price ceilings is unclear and the response was not of runaway
proportions.
However, the meat ceilings apparently did affect live animal and
meat trade with Canada. In February 1 9 7 3 , Canada lifted its $0,015
per pound duty on live cattle and $0.03 per pound duty on carcass
beef. Because the differential between Canadian prices and U.S.
prices was not sufficient to attract exports, live cattle exports to
Canada lagged sharply behind the previous year. This situation
changed in late July and early August. As live animal prices
advanced sharply in the United States, it became increasingly difficult
for U.S. slaughter plants to operate profitably under the meat ceilings.
Canadian packers, however, could buy U.S. live cattle, slaughter
them, and export the carcass beef back into the United States at
exempt prices. During August, when custom slaughtering of beef
became most prevalent in the United States, live animal shipments to
Canada moved up sharply and were partially offset by a similar
upsurge in dressed meat imports (Appendix Tables A -7 and A-8).
Export of live cattle to Canada remained high after U.S. meat
ceilings were removed, partly because U.S. prices declined sharply
when ceilings were removed. Canada, in response, reimposed the
$0,015 and $0.03 duties respectively on live animals and beef on
22 September 1973. The price differential continued to be attractive,
however, and in October exports reached a record high. In November

the Canadian government instituted an additional $0.03 per pound
duty on live animals and $0.06 on carcass beef. In late 1973 and
early 1974 the depressed cattle market in the United States produced
continued incentives to export to Canada in spite of higher duties,
and the Canadians in April 1974 took action to ban U.S. cattle ship
ments on the basis that they might contain DES (a hormone used
as an additive in feed). This ban was eventually lifted in August
1974, subject to certification and quotas based on 1969-72 shipment
levels.
M eat specialing . Data on meat specialing, which reflect both the^
extent of price reductions and the proportion of sales to which the
reductions applied, provide an interesting source of information on
changes in business practices to offset the impact of controls. The
available data are unfortunately not seasonally adjusted, which com
plicates analysis of month-to-month movements (Appendix Table A-9).
Moreover, the analysis is clouded by the normal influence of changes
in short-term supply and demand conditions.
In spite of the limitations of the data, a comparison of monthly
specials with their levels a year earlier yields some interesting results.
During 1972 beef specials were equal to or greater than they had been
in the corresponding months in 1971 nearly half of the time. Those
months during which specialing exceeded the previous year's level
generally reflect large supplies and stable or falling prices. Beginning
in September 1972 and continuing through February 1973, beef
specials exceeded year-earlier levels every month, except for October
1972 when they were the same as in October 1971. However, in
March 1973 specialing fell (red meat ceilings were imposed on
29 March 1973), and specialing continued equal to or below yearearlier levels through November of 1973. The 0.3 cent level recorded
in August 1973 was the lowest level in three-and-a-half years. This
low level came after ceilings on beef prices were extended when
Stage A of Phase IV went into effect, and cattle prices skyrocketed
to $60 per hundred weight in response to cattle feeders' cutbacks in
marketings. When the beef ceilings were lifted, specialing increased.
From December 1973 through all of 1974 beef specials were again
larger than the same month a year earlier.
The impact of the ceilings on pork is less clear than it is on
beef. In 1972, pork specialing was below 1971 levels except for two
months, and in March 1973 it fell below the 1972 levels. Except for
June, it remained below year-earlier levels until September. After
September 1973 specials on pork remained larger than a year earlier.
76

While these data cannot be considered conclusive evidence, they
suggest that when ceilings were in effect, retailers reduced the amount
of specialing below normal levels in order to compensate in part for
the lack of upward pricing flexibility.
Margins. Essentially controls were applied to processing and
distribution margins in the food industry, except during periods when
ceilings or freezes were imposed. Raw agricultural products were
exempt during the entire period. Since information on margins is
available for the food sector, it is possible to examine the behavior
of those margins during the two freezes and three distinct periods
of cost pass-through controls 10 from August 1971 to April 1974.
The market basket components shown by program periods in Table 18,
on a seasonally adjusted basis, provide aggregate information on
price and margin changes. During Phase I, the impact of the freeze
is reflected by a decline in the farm-retail spread and a slowdown
in retail food price increases. Although farm prices actually declined
during this period, seasonally adjusted farm prices rose more rapidly
than they had earlier in the year.
During the entire period of controls, increases in exempt raw
farm commodity prices were generally passed through to retail food
prices, with margins rising gradually through 1972 and more rapidly
when farm prices and other costs accelerated. Farm-retail spreads
changed somewhat erratically from month to month; margins were
generally compressed when farm prices first began rising sharply
and temporarily widened when farm prices declined or rose less
sharply. After rising only moderately during Phase II, the farm-retail
spread increased much more rapidly during Phase III, as shown in
Table 18. This tends to support the widespread view that Phase II
was a more effective program.
The mandatory regulations applied in the food industry during
Phase II, however, were continued with only limited relaxation in
16 The following distinctions highlight the differences in the various phases of
the controls applicable to the food industry:
Phase 11. Rules were consistent with nonfood sector described earlier except
that many food processors were able to qualify for volatile pricing agree
ments that waived prenotification requirements on raw material costs and
limited the cost pass-through to dollar-for-dollar increases for categories or
items.
Phase III. Rules followed Phase II except retailers were allowed to apply
percentage markups to items, categories, or total food sales at the hrms
option.
Phase IV. Phase III rules continued for wholesalers and retailers. Prenotification requirements were dropped for processors in favor o a gross
margin restraint on raw material costs for all processing firms, irms wer
allowed flexibility in choosing base periods for gross margin computation.

Table 18
MOVEMENTS IN MARKET BASKET STATISTICS BEFORE
AND DURING ECONOMIC STABILIZATION PROGRAM
(seasonally adjusted annual rates)

Period

Retail
Cost

Farm-Retail
Spread

Farm
Value

(percent)

Eight months prior to Phase I
(January 1971 to August 1971)

3.9

4.3

8.9

Phase 1
(August 1971 to November 1971)

3.2

-6 .4

14.0

Phase II
(November 1971 to January 1973)

8.4

1.5

17.4

Phase III
(January 1973 to June 1973)

20.6

12.2

37.2

Phase IVs
(June 1973 to April 1974)

18.1

26.9

7.4

During controls
(August 1971 to April 1974)

14.4

10.8

19.7

5.0

3.7

8.6

Six months after termination of
controls (April 1974 to October 1974)

a Includes a general price freeze from 8 June to 18 July.
Source: U.S. Department of Agriculture, Economic Research Service, National
Economics Analysis Division.

their application for Phase III, raising doubts whether this could be
the main source of rapid margin expansion. The temporary squeeze in
margins that occurred with the sharp spurt in farm values of nearly
11 percent between November 1972 and January 1973 could have
been a more important source. This possibility is supported by the
fact that margins rose at a 4.4 percent rate during the first year of
Phase II, through November 1972 (when margins were 1.6 percent
above their average for 1972), compared to a 4.3 percent rate from
November 1972 through the end of Phase III in June 1973 —rates
almost identical to the rise in margins in early 1971 before controls
were imposed. Margins rose very sharply in late 1973 and early 1974
during Phase IV, when the food industry regulations were modified
to permit almost immediate pass-through of most processing and
distribution cost increases, which by that time had risen sharply from
earlier levels.
78

Lumber
When the stabilization program began, the housing industry was in
the midst of a strong cyclical recovery from its 1 9 6 9 -7 0 slump.
Housing starts rose to 2.1 million units in 1971 from 1.5 million in
1 9 7 0 , an increase of 4 0 percent. Softwood lumber output rose only
about 8 percent in 1 9 7 1 , however, and the timber cut from national
forests in 1 9 7 0 - 7 1 dropped 10 percent from the previous fiscal year.
A large increase in net imports coupled with a drawdown in stocks
enabled the lumber industry to meet demands from housing construc
tion, although at considerably higher prices than had previously
prevailed (Appendix Table A-10).
Residential construction increased further in 1972, with housing
starts totaling 2 .4 million units. Softwood lumber production rose
only moderately in 1 9 7 2 (6 .0 percent), while production from the
national forests increased by 14 percent in 1 9 7 1 -7 2 . Although im
ports rose, lumber and log exports also increased, limiting the expan
sion of domestic supply. Timber cut from national forests accounts
for about 2 5 percent of domestic softwood lumber production, and the
failure of the federal government to adapt its supply policies to
demand conditions is illustrated by the fact that there was a net
increase of only 1.7 percent in supply from the national forests over
a two-year period in which housing starts rose by 60 percent.
With strong cyclical lumber demand outpacing increases in avail
able supplies during 1 9 7 2 , market pressures for further increases in
prices were strong and lumber prices on average rose throughout
most of the year. Prices charged by particular firms, however, rose
by widely varying amounts because the effects of controls on indi
vidual firms were uneven. Some firms could charge relatively high
prices because their prices were based on the costs of imported lumber
or purchase of exempt stumpage. Fully integrated producers or firms
producing under long-term stumpage contracts had small cost
increases and, therefore, could increase prices only moderately. Firms
approaching their base period profit margin limits were sometimes
constrained from raising prices even though they were incurring
higher costs. Wide discrepancies between prices quoted by particular
firms for comparable products led industry trade publications to
suspend reporting of some prices and to publish price ranges. The
reaction in the marketplace to these conditions ranged from the
development of practices to evade the controls (practices such as
reduced dimensions or altered specifications to create "new products
or resales of lumber with successive application of markups) to

reports of curtailed production and diversion of supplies to export
markets.17 The stabilization policy response included revocation of
the small-firm exemption for lumber dealers in order to remove
opportunities for arbitrage by buying at controlled prices and selling
at uncontrolled prices, and in late 1972 more stringent prenotification
and reporting requirements in the lumber industry.
Lumber prices continued to rise during most of 1972, but the
wide differential between average domestic prices and prices of
imports from Canada is evidence that lumber prices were held below
market levels during Phase II.18 The steep rise in lumber prices after
Phase III began, along with the collapse in price dispersion as lumber
producers applied the more flexible rules, confirms that suppression
of lumber prices below market levels occurred during 1972. While
development of more stringent controls was not ruled out in early
1973, the Cost of Living Council addressed the issue by engaging in
a more intensive dialogue with industry representatives and estab
lishing a high-level Lumber Task Force charged with the responsibility
of obtaining commitments from the Japanese to curb imports and to
expand sales of timber from the national forests.19 The task force
was able to obtain funding and commitments to boost federal timber
sales in 1973, but other forces were also at work that would reduce
pressures for higher lumber prices in 1973. Housing starts began to
decline early in 1973 in response to the rapid rise in interest rates
and the expanded housing stock after more than two years of record
housing construction. By August 1973, housing starts were back to
two million units. Lumber prices began declining in June 1973. When
Phase IV was announced in July, the lumber industry was released
from controls on the basis of improved price performance and a
slackening in the supply situation. It is worth noting that despite
the steps taken to expand lumber production in 1973, output actually
increased by less than 1 percent for the year (although the cut from
the national forests in fiscal year 1973 rose to 12.4 billion board feet,
17 See, for example, Rinfret-Boston Associates, Inc., Prices and Production, An
Economic Analysis of Softwood Lumber and Plywood: 1970-1973 (New York,
April 1974), p. 60ff., and William Poole, "Wage-Price Controls: Where Do We
Go from Here?" Brookings Papers on Economic Activity, no. 1 (Washington,
D. G : The Brookings Institution, 1973), p. 292ff.
18 Price spreads on the order of $35 per thousand board feet were commonly
reported for standard products with domestic prices on the order of $125 per
thousand board feet. Wider spreads for comparable items were frequently
reported in particular cases in the last part of 1972. See Prices and Production
by Rinfret-Boston Associates, Inc., p. 61.
19 See "Sky-High Lumber Prices—Can Anything Be Done?" U.S. News & World
Report, 19 March 1973, p. 39.

up 6 percent from the previous year). In addition, net imports de
clined in 1973. Thus, the primary factor reducing price pressures in
the lumber sector seems to have been the reduction in demand as a
result of a decline in residential housing construction rather than
federal government supply actions (Figure 8). Federal government
timber policies are, however, a significant factor in the lumber market,
and responsive federal policies could contribute substantially to sta
bilizing lumber prices.
Petroleum Prices
A brief review of price control policies in petroleum is appropriate
not only because crude petroleum prices on world markets roughly
tripled by early 1974, but also because of the special features of the
controls in that sector and the continuation of price controls for
petroleum products under separate authority after controls in the
rest of the economy were ended. The direct impact of the surge in
petroleum prices on consumer prices and the importance of petroleum
as an input in most sectors of the economy meant that the inflationary
consequences of the increase in petroleum prices were immediate and
pervasive. Sharp increases in petroleum company profits at the same
time heightened political sensitivity to the price issue. Only an outline
of events is given here to avoid obscuring the general approach in a
detailed technical treatment of petroleum price controls.20
Petroleum prices on world markets rose above domestic price
levels in early 1973. Since imports accounted for about one-third of
domestic petroleum consumption, failure to permit price increases
so that increased import costs could be passed through would threaten
a serious reduction in imports, and therefore in domestic supply.
Moreover, since imported petroleum products were generally not
physically distinguishable from domestically produced products, there
would be strong pressures for prices of domestically produced prod
ucts to rise to world market levels.
Mandatory regulations permitting only limited pass-through of
increased costs were placed on the largest petroleum companies in
March 1973. By mid-year it was clear that more complex and com
prehensive regulations would need to be developed unless all domestic
prices were permitted to increase to match rapidly rising world prices.
20 A discussion of petroleum price control policy during the first year of special
regulations for that sector is contained in "History of Petroleum Price Controls/'
Historical Working Papers on the Economic Stabilization Program, Part 2,
pp. 1223-1340.

INDEX OF RELATIVE WHOLESALE PRICES OF SOFTWOOD LUMBER AND
LEVELS OF NEW PRIVATE HOUSING STARTS, 1958-74

2800

^starts (in thousands)

Index of relative prices of softwood lumber

180

2600

170

2400

160

2200

150

2000

140

1800

130

1600

120

1400

110

1200

100

1000

800

80
70

600

65
66
71
74
67
69
70
72
73
68
Year
Source Bureau of Labor Statistics, Wholesale Price Index Division; U.S. Department of Commerce, Bureau of the Census, Construction Sts istics Division.

1958

The system of controls that was developed and applied in August
1973 was relatively simple in concept but complex in application.
There were difficulties in establishing cost increases for companies
with integrated production, transportation, refining and sales opera
tions; complicated patterns of sales and exchanges of crude and
refined products among companies; and diversity of energy, fertilizer
and petrochemical products that were affected. The substantive effect
of the system was to keep average domestic prices below marginal
costs of imported petroleum to the U.S. economy.
Price ceilings on domestically produced crude petroleum were the
central element in the controls system. Holding prices for domestically
produced crude petroleum below world market price levels signifi
cantly reduced the total cost increases that would otherwise have been
passed through to price increases throughout the refining and distri
bution system. To encourage increased domestic production, no
control was exercised over production exceeding a specified base
level, and to augment the incentive for increased production an equiva
lent amount of oil production within base levels was removed from
control if production was increased. (Production from small stripper
wells was exempted later by congressional action.) The price level for
domestically produced crude oil that was removed from controls was
essentially indeterminate over a broad range because of possibilities
for arrangements to tie in sales of controlled and uncontrolled oil.
Practices of this sort apparently did not become prevalent however,
because of an implicit threat of imposition of ceilings if prices of
exempt domestically produced oil rose above world market levels
and because buyer-seller arrangements for old oil were frozen in
late 1973. Increased costs of imported crude oil and of domestic oil
not subject to controls could be passed through to the consumer level
at intervals, along with periodic increases in margins to offset reduced
volume during the embargo in the winter.21
The controls on petroleum product prices kept prices significantly
below levels that would otherwise have been reached during the
embargo, and of course the reduced supplies of petroleum were
accompanied by shortages and conservation measures in addition to
21 The initial approach of the regulations published in August delayed pass
through of cost increases at the retail level for gasoline, diesel fuel, and heating
oil compared to price increases to reflect increased costs incurred by refiners and
importers of petroleum products. This approach was quickly challenged in the
courts and Congress as well as through publicity efforts raising the threat or
strikes by the retail service station operators who were sufficiently numerous to
make their influence felt. Instead of squeezing retail margins and exerting back
pressure on the pricing policies of the large oil companies, the controls, in fact,
led to retail margins that rose by about 25 percent during 1973.

higher prices. With prices below market levels, a mandatory allocation
system was devised in an effort to equalize the degree of shortages
both geographically and within the production sector. While an
adjustment of one dollar was made to domestically produced crude
oil price ceilings during the winter, the price ceilings held crude oil
prices for somewhat over half of domestic consumption at about half
the level of world market prices in early 1974.
Petroleum product shortages, particularly for gasoline, were
highly visible during the embargo. The large price increases that
occurred were not sufficient to curb consumption to the level of the
suddenly reduced supplies. It is clear that petroleum prices would
have surged much more strongly than they did had there not been
controls, and that the adjustment costs in the economy from price
increases sufficiently large to ration available supplies during the
embargo would have been unusually severe. It is also clear, however,
that—through the imposition of price ceilings to reduce the price
surge—the controls also helped to sustain domestic levels of petroleum
products usage, and the petroleum-exporting countries were bene
ficiaries of the higher consumption levels and lower average prices
prevailing in the U.S. economy. The cartel of major petroleumexporting countries was able to maintain further increases in crude
petroleum prices during 1974 by curtailing production to levels con
sistent with import demands.22
Cattle Hides
Cattle hides provide an interesting example of a commodity that
during the early stages of the controls received a disproportionately
large share of attention relative to its importance in the overall
economy. In the spring of 1971, Argentina imposed export controls
on hides. These controls significantly reduced their supply in inter
national trade. Markets for hides were also affected by the imposition
of Phase I in August 1971. When they experienced difficulty in
obtaining supplies at base prices, U.S. tanners stepped up lobbying
efforts for export controls (their efforts had been successful in 1966).23
After Phase II began, domestic supplies were adequate but prices were
sharply higher. In 1972 prices continued to rise, reaching an average
22 See Richard B. Mancke, Performance of the Federal Energy Office (Washington,
D. C.: American Enterprise Institute, 1975) for an evaluation of price and
allocation controls during the embargo.
23 See John Sheahan, The Wage-Price Guideposts (Washington, D. C : The
Brookings Institution, 1967), pp. 71-72 for a discussion of actions in this sector
during the period of the guideposts.

level more than double that of 1971, and contributing 1.1 percent to
the rise in wholesale industrial prices for the year even though they
accounted for only .246 percent of the industrial component of the
index.
In response to the large increases in hide prices relative to other
commodities, considerable time in Phase II was devoted to analyzing
and debating alternative policy strategies to cope with the U.S. leather
industry's problem. The Price Commission modified its regulations
to limit the pass-through of leather manufacturers' costs to dollar-fordollar price increases, and in mid-1972 the Department of Commerce
imposed export limitations to stem the outflow of hides from U.S.
markets. This latter action, however, was quickly reversed in response
to counter-lobbying by cattle producers who convinced the Congress
that export controls were detrimental to their interests.
It is worth noting, in view of the concern the issue elicited
during 1972, that hide exports increased only 10 percent over the
previous year, and exports in the previous year had been affected by a
dock strike (Appendix Table A -ll). Moreover, after their peak in
November 1972, hide prices declined and continued downward during
the commodity price explosion of 1973 despite a reduction in U.S.
cattle slaughter. Prices of hides did, however, rise temporarily during
post-Freeze II "bulge" in August 1973 when cattle were withheld
from marketing.
Fertilizer
Following a period of excess capacity in the late 1960s, the controls
caught the fertilizer industry in a changing posture as worldwide
demand pressures were moving into closer balance with production
capacity. Prices paid by farmers for anhydrous ammonia had reached
their lowest level in late 1969 and early 1970 after declining for
several years. Prices then turned upward and fertilizer markets were
tightening by the time Phase I was launched. The industry s petition
for relief from controls in late 1971 maintained that the base period
for profit margin limits established during a period of sluggish per
formance in the late 1960s unfairly penalized the fertilizer industry.
Although relief from controls was denied, many firms were granted
additional pricing flexibility by the Price Commission.
It is difficult to determine whether the controls held fertilizer
prices significantly below market clearing levels during Phase II.
Despite the moderate size of the increase in retail prices, domestic
use rose only slightly in fiscal year 1972 and farmers experienced no

Figure 9
CORN YIELD RESPONSE TO NITROGEN APPLICATIONS
(Indiana, 1967-69)

Note: The corn-nitrogen price line shows the relationship between the price of
corn and the price of nitrogen in 1974. (Corn at $3.50 per bushel and nitrogen
at 200 per pound yields a ratio of 3.50/.20 = 17.5.) At these relative prices the
optimal rate of nitrogen application is slightly over 170 pounds per acre. In
1973 the price ratio was about 26.6 implying an optimal application rate about
10 pounds higher than in 1974. Actual application rates in Indiana, however,
were 124 pounds and 113 pounds in 1972 and 1973, respectively.
Source: John T. Martin, “How Much Can You Afford to Pay for Nitrogen?”
Purdue Farm Management Report, April 1974, p. 2.

major difficulties in obtaining supplies. However, the large increase
in diverted acres in 1972 held down demand. In late 1972 and early
1973 the rise in grain prices, coupled with the relaxation in acreage
diversion, raised the demand for fertilizer. The fertilizer market
began to tighten significantly by mid-1973 when grain prices relative
to fertilizer prices made increased fertilizer usage especially attractive.
Figure 9 shows that at prevailing relative prices, application rates
were still below optimal levels, making fertilizer an attractive input.
During the summer and fall of 1973, grain prices were rising
and fertilizer prices were subject to controls, and as a consequence,
increased fertilizer usage became particularly profitable to farmers
in seeding wheat for harvest in 1974 (Table 19). Farmers found that
traditional fertilizer dealers were no longer able to meet their needs.
Dealers began to cut off slow-paying customers, credit sales became
more difficult to obtain, and distribution channels were generally in
a state of flux. The fertilizer industry again petitioned the Cost of
Living Council for release from controls, arguing that since agri
cultural production had been completely released from acreage con
trols for 1974, the fertilizer industry should have the flexibility to
meet this demand. The industry further argued that because world
prices were higher than prices which could be cost-justified domesti
cally, there was an enormous incentive to sell abroad.
The expansion of food supplies was a major objective of policy
makers in 1973 and 1974, and fertilizer—a major input into the food
production system as opposed to a consumer item—therefore became
an early candidate on the decontrol agenda.24 Controls were lifted
from the fertilizer industry in October 1973 in return for commitments
from the companies to expand production and reduce planned ship
ments into export channels. Fertilizer prices in both domestic and
world markets rose sharply after decontrol. By 15 April 1974,
anhydrous ammonia was selling to farmers for $183 per ton, even
though manufacturers had been asked by the council to hold whole
sale prices at January 1974 levels. By September 1974, farmers were
paying about $229 per ton for anhydrous ammonia (Table 19). Spot
prices on world markets for many products were quoted in a $350- to
$400-per-ton range in 1974 (Table 20).
One of the effects of the lifting of controls on fertilizer was a
transfer of income from U.S. farmers to fertilizer manufacturers.
However, if the controls had remained in effect and U.S./world price
differentials had widened further with rising world market prices,
24 See "Why Fertilizer Is in Such Short Supply," Business Week, 6 October 1973,
p. 84.

Table 19
PRICES OF CORN, WHEAT, AND ANHYDROUS
AMMONIA FERTILIZER, 1970-74

Prices
1970

1971

1972

1973

1974

Wheat
($ per bushel)3

1.33

1.34

1.76

3.95

4.04

Corn
($ per bushel)a

1.33

1.08

1.57

2.55

2.95

76.80

79.30

80.80

92.50

229.00

Anhydrous ammonia
($ per to n )b

a Prices received by farmers (crop year).
b Prices paid by farmers on 15 September.
Source: U.S. Department of Agriculture, Statistical Reporting Service, Agricultural
Prices, Annuai Summary, June 1974 and June 1975 issues.

Table 20
COMPARISON OF DOMESTIC (U.S.) AND EXPORT PRICES
OF GRANULAR TRIPLE SUPERPHOSPHATE
AND DIAMMONIUM PHOSPHATE
($/net ton f.o.b. Tampa, Florida)

Year
Ending
30 June

TS P C

DAPd

TSP

DAP

TSP

1969

48.30

66.30

35.65

n.a.

12.65* >

U.S. Price8

Export Priceb

$/Ton Differential
DAP
n.a.
5.02 e

1970

42.15

58.10

46.19

53.08

4.04

1971

40.85

56.45

53.48

51.52

12.63

1972

42.35

58.30

50.82

75.77

8.47

82.60

96.80

35.40

31.90

170.30

203.80

1973

47.20

64.90

1974

120.00f

150.00f

290.309

353.809

4.93 e
17.47

8 C.f. industries, net selling price to member, f.o.b. Tampa.
b Award prices on exports as reported by International Commodities Export Corp.,
f.o.b. Tampa.
c TSP— triple superphosphate.
** DAP— diammonium phosphate,
e in favor of U.S. price.
* Estimated.
s ICEC reports of June and August 1974.
Source: U.S. Department of Agriculture, Economic Research Service, National
Economics Analysis Division.

supplies available for domestic usage might have been significantly
reduced. In addition, less efficient distribution among domestic users
and more widespread shortages might have reduced total crop output
in 1974.
The sharp rise in fertilizer prices contributed to a worldwide
flurry of planned additions to plant capacity. Continuation of domes
tic controls might have discouraged domestic investment in additional
fertilizer production capacity, and diversion of U.S. production to
export markets might have delayed expansion in other countries if
prices and supplies on world markets were significantly affected. It is
also possible that this capacity might have come on stream sooner if
the controls had not previously held prices down. However, federal
and state regulation of natural gas prices complicates an assessment
of the influence of price controls on investment decisions. Moreover,
the cyclical nature of the fertilizer industry—related partially to world
grain movements—also complicates assessment of the effects of con
trols on production and investment decisions in the industry. It is
likely, however, that domestic supplies would have been lower and
the incidence of shortages more severe in 1974 in the absence of de
control of fertilizer and the large price increases that followed.
Other Sectors
Among the other sectors in which marked policy changes occurred
in the application of controls, the most important were health services
and rents for residential units. Regulations were specially tailored
to the economic and institutional characteristics of each sector. For
health services the main features of the regulations were a system of
ceilings on increases in physicians' and other professional fees and
crude limits on revenue increases obtained by raising rates for hospital
care. Although the health services controls were even more deficient
in taking into account changes in costs and services than the controls
that were applied in most other sectors, a significant deceleration in
the rise in health services prices occurred during the stabilization
program. A more carefully tailored system for controlling health
services costs was developed during 1973, and continuation of con
trols beyond 30 April 1974 was initially requested only for this sector.
Control of residential rents was important both because of the
disproportionately large share of resources that were devoted to
compliance and enforcement activities and because of its political
appeal. The strength of political forces favoring rent control became
evident when all rents that remained under control were exempted

under Phase III in 1973, and reimposition of rent controls through con
gressional action was narrowly averted.
By mid-1973, controls were impinging on normal market pro
cesses in a wide range of industry sectors, market situations, and
individual firms. The growing incidence of market pressures pushing
prices to levels at which they were constrained by controls trans
formed the character of policy actions in administering the program.
Greater emphasis began to be placed on administering existing regu
lations to limit disruptive effects on markets for particular sectors
and firms. Resolution of microeconomic issues, consequently, was
given more attention than were broad changes in the regulations. A
comprehensive survey of the conditions in, and influences of controls
policy on, particular markets or submarkets would require data much
more detailed than those currently available. However, examples of
some of the ways in which controls influenced market efficiency are
summarized in the following chapter.

5
CONTROLS AND EFFICIENCY

The concept of efficiency is central to economics, and the general
principle that competitively determined prices and wages are con
sistent with efficient resource usage is well known. Failure to achieve
full efficiency in resource usage results from production and consump
tion decisions based on price and wage relationships that differ from
those that would prevail in competitive markets. Failure to achieve
full efficiency may occur because markets are not fully competitive or
because of market imperfections such as externalities in which costs
or returns are not fully reflected in prices. Government regulatory
practices and standards, although they are frequently designed to limit
the effects of market imperfections, may sometimes contribute instead
to reduced efficiency if they are applied with a rigidity that reduces
competition, distorts production and pricing decisions, or discourages
supply. General controls on prices and wages also have the potential
for imposing serious costs on the economy by reducing efficiency.
Price and wage controls can give rise to inefficient resource usage,
because suppression of price and wage levels also usually influences
interrelationships between them. Controls can introduce inefficient
business practices, and lead to patterns of resource usage that add
to inefficiency arising from existing market imperfections. Moreover,
their influence is extended over a major share of the economy. The
magnitude of the costs that may be imposed by controls is not easily
estimated, but constantly changing conditions in the marketplace
make it virtually impossible to manage a system of stringent controls
without creating distortions in resource usage. Particular instances of
market disruptions, misalignment of prices, wasteful business prac
tices, or inequitable wage relationships resulting from controls have
usually become evident, but public reaction to these costs builds
slowly because most of the costs are hidden and not easily quantified.

Considerations of efficiency are usually given primary emphasis
in economic analyses of market problems and policies. It must be
recognized, however, that the cost of distortions resulting from con
trols should be weighed against costs of price or wage adjustments
that would occur without controls. For example, costs of occasional
shortages of meat, inefficient allocation of meat consumption, and
confusing price signals to producers should be weighed against the
prospect that a large short-term rise in retail meat prices could raise
the level of future wage adjustments, thereby building in longer-term
inflation that would need to be offset later by restrictive demand
management policies that would depress production. There are also
serious costs that result from rapid adjustment to large short-term
price changes. For example, the cost of short-term adaptation to a
surge in energy costs may be extremely high compared to adjustment
costs over a longer term during which existing investment can be
modified or replaced to reflect a new pattern of relative prices. Finally,
considerations of equity as well as efficiency are important, particu
larly for wages and income distribution, and the temporary departures
from efficiency that may result from controls may be worthwhile if
the time they provide for adaptation relieves apparent inequity and
reduces social tensions or labor strife.
Unfortunately, most of the evidence on distortions resulting from
controls is fragmentary and anecdotal in character and does not lend
itself to quantification of the costs that result from such distortions.
Yet the symptoms of inefficiency were sufficiently pervasive and their
potential cost sufficiently important to merit a brief general discussion
of the problem in addition to that contained in the preceding sections.
Symptoms of Inefficiency
During the first year of controls, there was some evidence that con
trols were interfering with the price adjustments necessary to maintain
efficiency and avoid shortages, but the evidence was limited mostly
to the lumber sector and to a small number of situations in which
pricing to reflect increases in current production costs led either to
dispersion in prices for similar products or to prices too low to satisfy
current demand.1 The stabilization regulations were based on the idea
that price adjustments should be allowed to reflect cost increases,
with shifts in demand in most instances expected to be accommodated
1 For example, sugar and certain other food products prices were differentially
affected by technical details of the regulations, and modifications in the regu
lations or exceptions for particular firms were made to alleviate these situations.
92

through changes in output. It became apparent in the early months
of the program, however, that situations would arise in which applica
tion of the regulations would forestall some price increases that were
necessary to maintain efficiency.2
In markets with relatively inelastic supply, short-term demand
changes that were large relative to short-term cost increases created
one class of problems under cost pass-through regulations. Shipping
rates for ocean tankers, typically characterized by wide fluctuations
in response to demand changes, on average were rising in early 1972.
Many individual tankers could obtain rates in the market exceeding
those received for particular shipments during the base period, but
under the regulations they could not charge higher rates because
costs had not increased. Pricing of radio and television advertising
had traditionally reflected shifts in audience ratings of shows in
addition to more stable factors, and these demand-related changes
were not accompanied by short-term cost changes. Since export prices
were exempt from controls, demand increases for internationally
traded products created incentives to export and opportunities to earn
windfall profits for traders buying at controlled domestic prices and
exporting at higher world prices.
Differences among industries and among the structures of firms
within industries sometimes complicated the application of cost pass
through regulations. In the case of sugar, some fruits and vegetables,
and later of lumber, vertically integrated firms often experienced no
short-term cost increases that could be used to justify higher prices,
while other firms purchasing inputs such as raw agricultural products
and standing timber in exempt markets were bidding up raw material
input costs and raising prices proportionately. The presence of large
inventories in some cases also weakened the linkage between cost
increases and current demand conditions. For sectors engaged in
processing and distribution of food products, changes in demand or
supply usually were quickly reflected in changes in costs and prices
throughout the production and distribution chain. In some sectors in
which prices of major inputs were not exempt, short-term demand
increases created an incentive for firms to increase current operating
costs (such as wages), both to provide the basis for price increases
and to avoid increasing profits above base period levels. The impor
tance of this indirect influence on wages in the economy is uncertain,
2 During the first week of Phase II, for example, rising cattle prices, with the
largest meat-packing firms subject to prenotification and a delay of up to thirty
days for price increases, showed the need for special provisions for inputs wit
volatile prices in order to avoid market disruption and markedly different treat
ment of large and small firms.

but one case in the textile industry in which a wage adjustment was
apparently motivated mainly by profit margin considerations was
brought to the attention of the Cost of Living Council in 1973.3
The problem of prices on world markets rising above prices per
mitted under domestic controls, stimulating increased exports, first
appeared for cattle hides during the ninety-day freeze. When similar
conditions developed in the silver market, silver was exempted from
controls, but no further exemptions were made during 1972 even
though world prices moved above domestic prices for several products
(such as lumber, zinc, and molasses), and prices on international
markets were rising and often approaching domestic price levels for a
broad range of products. While rising prices on world markets posed
few difficulties for domestic price controls during 1972, the surge in
dollar prices of most commodities traded in international markets
during 1973 (including the prices of metals, petrochemicals, and fer
tilizer) posed problems for any system of domestic controls.
Extension of controls to raw agricultural commodities would
have created similar problems in that sector. The stringent limits on
domestic prices after the June 1973 freeze, with world prices con
tinuing to rise, threatened diversion of domestically produced sup
plies to export markets. Exemption from domestic controls was
granted for commodities such as copper scrap and a number of other
nonferrous metals. Prices of fertilizer and petrochemical products
were also exempted so as to reduce incentives for trade diversion,
and price adjustments to levels above those generally permitted under
the standards were granted for other commodities such as copper and
aluminum.4
When prices of more and more commodities were held below
market clearing levels in late 1973, symptoms of inefficiency became
increasingly widespread and diverse. Curtailment of domestic supply
was sometimes threatened by increased exports, reduced production
to avoid losses, and failure to expand production through use of
marginal production capacity. Lack of availability and wide differ
ences in prices of material inputs complicated production planning
and threatened to disrupt production schedules. Distribution and
purchasing operations were complicated by multiple prices and
instances of bartering in order to reduce costs or obtain scarce
3 In this case, as in many others, the matter was brought to the attention of the
Cost of Living Council informally, and it was dealt with without the need for
formal action.
4 See, for example, Sidney Fish, "Controls Spur Exports of Scarce Commodities,"
Journal of Commerce, 14 December 1973, p. 1.

materials, and black markets were frequently reported.5 Shortages
were perhaps the most commonly reported symptom of inefficiency,
although it was often difficult to distinguish between shortages and
other symptoms in the absence of general price ceilings. Such dis
tortions were instrumental in shaping public attitudes toward
decontrol.
Cost Pass-Through and Product Mix
Limiting price increases to cost increases, instead of controlling overall
processing margins with complete flexibility in relative prices, in
some circumstances exacerbated shortages for certain products. For
industries operating at capacity levels, incentives to shift the mix of
products were created under regulations that linked price increases
to cost increases, without permitting increases in some prices to offset
reductions in others. These incentives were created even though
full pass-through of cost increases was permitted, and price increases
to reflect these cost increases could be spread over a broad range of
product lines. For cyclical reasons and because of changes in import
competition or other factors, profitability of individual product lines
may diverge from that of other product lines produced by the same
firm. When conditions changed and demand was sufficiently strong to
support expanded production of relatively more profitable lines, incen
tives were created for shifting production toward high-margin product
lines and for raising prices for these product lines to the extent
justified by overall cost increases.
During 1973 when demand levels pressed strongly on available
production capacity, there were several industries in which shortages
became severe for product lines that had previously been produced at
low profit margins. Some users were forced to switch to higher
quality paper when lower quality paper became unavailable.6 Some of
the most marked steel shortages were in product lines such as
concrete reinforcing bars, mining roof bolts, and baling wire, which
had earlier been subject to strong import competition. A wide range
5 Such instances were frequently reported on the basis of surveys by the National
Association of Purchasing Managers and in trade publications and newspapers.
Some instances in sectors such as petrochemicals and plastics and nonferrous
metals are discussed in the Economic Stabilization Program Quarterly Report
covering the period 1 October 1973 through 31 December 1973, chapter 2,
pp. 5-34. See also Herbert Koshetz, ''Black Market in Textile Yarns Is Seen,
New York Times, 15 January 1974, p. 49.
6 The case of paper is listed among the "proven" distortions in Appendix Q of
Statement of John T. Dunlop, p. A-114.

of petrochemical inputs and products produced by petroleum refiners
were in extremely short supply, after a period in which prices in the
chemical industry had been cyclically depressed. The shortages of
petrochemical feedstocks were particularly noteworthy, because allo
cation of a disproportionate share of cost increases to these products
was encouraged by the regulations which delayed price increases for
gasoline, diesel fuel, and home heating oil.
Shortages
Reports of shortages were pervasive in late 1973, and the reports
often attributed shortages to the price controls.7 Shortages are the
inevitable counterpart of controls that keep prices below market clear
ing levels in a simple, static, analytical framework, and the existence
of shortages is prima facie evidence that controls are binding. Short
ages have sometimes emerged, however, in strong cyclical expansions,
and phenomena such as lengthening order backlogs, slower delivery
schedules, and temporary unavailability of products or materials
have been quite common. Thus in an environment with rapidly
changing supply conditions and strong cyclical demand, shortages and
related phenomena may be partially attributable to concern with
customer-supplier relationships expressed through maintenance of
relative stability in materials availability and prices.
Nevertheless, controls can exacerbate shortages by influencing
demand and available supply. If controls are generally thought to be
holding prices below market levels, the risk of a decline in prices of
materials purchased as inputs and temporarily held in inventory is
reduced, and the potential for implicit capital gains if prices are
decontrolled or price increases are granted is enhanced. In addition,
controls that effectively constrain prices increase the probability that
essential materials or products may not be available when they are
needed. This encourages users to purchase materials before they are
needed and hold them temporarily in inventory as a hedge against
possible disruption of production schedules. Legal limits on prices
7 Shortage situations were widely reported in trade publications and in the
news media in late 1973 and early 1974. Widespread concern about the incidence
and causes of shortages led to three major surveys in late 1973 by the National
Association of Purchasing Managers, the National Association of Manufacturers,
and the National Association of Business Economists. Long lists of materials in
short supply were reported in each, and shortages and black markets were fre
quently attributed to the controls. See also "Managing in a Shortage Economy,"
Business Week, 10 November 1973, p. 150, and "More and More Scarcities:
Who Is Feeling the Pinch/' U.S. News & World Report, 3 September 1973, p. 15.

foreclose the possibility of bidding up prices to obtain essential
materials when those materials are immediately necessary to maintain

production schedules or to avoid delays.
If purchasing policies were significantly influenced by controls in
this manner, these policies would have raised demand above normal
current production requirements for products and materials in which
the difference between price limits and market prices was largest and
the potential for shortages greatest. A tendency for inventory
build-up would be expected, although it might not necessarily be
reflected in normal inventory data. It might be reflected in somewhat
earlier purchases of supplies and materials by final users instead of
larger inventories for manufacturers and distributors.
The pattern of inventory accumulation for all manufacturers and
distributors indicates that firms were generally attempting to increase
inventories in late 1973 and early 1974, even though serious shortages
and prices significantly below market levels were concentrated in a
limited range of basic materials and products. There were widespread
reports of particular instances in which advance material purchases
were made and purchasing practices were tailored to shortage condi
tions. There were reports from construction firms of advance delivery
of concrete reinforcing bars to avoid costly delays in projects should
these materials not be available on schedule.8 In the petroleum prod
ucts area, there were reports of a build-up of propane inventories and
gasoline storage, and gasoline stocks rose toward the end of each
month in anticipation of the granting of new price increases.9 There
were also reports of purchases of certain scarce materials for use in
bartering for other materials in short supply because prices were
kept below market levels.
In 1973 price ceilings applicable to individual firms instead of
industry-wide price ceilings may have increased incentives for acquir
ing inventories in excess of immediate production needs. Firms having
established relations with suppliers constrained by low price ceilings
had a strong incentive to take delivery of all supplies that they were
allocated, because prices from alternative sources of supply were
often higher and further price increases were being granted
®These practices were reported bv construction contractors, who frequently pre5!rr! >d higher prices to shortages. See, for example, "Builders Warn: No Rebars,
No B u ild in g Business Week, 8 December 1973, p. 37, and Michael K. Drapkin,
r
C? ncrete-Reinforcing Bar Shortage May Severely Hurt Nonresidential
ding," Watt Street Journal, 21 January 1974, p. 24.
The behavior of inventories is emphasized in Richard B. Mancke s analysis
o
e influence of petroleum price controls in Performance of the Federal nergy
Ujfice.

periodically. In the fall of 1973, for example, price ceilings for
domestic copper producers were $.60 per pound. Moreover, fabricated
copper products could be priced on the basis of costs ranging from
$.60 per pound for domestically produced copper or $.77 per pound
for copper scrap to over $1.00 per pound for spot market purchases of
imported copper. Similar conditions prevailed for other nonferrous
metals such as zinc, lead, and aluminum as well as for a variety of
steel and petrochemical products.10
It is extremely difficult to distinguish between the influence of
controls and the influence of cyclical factors on the widespread inci
dence of shortages in 1973. The changes in market conditions result
ing from shifts in supply or demand were the underlying forces
creating pressures for either higher prices or shortages. It is possible
that the controls themselves made an independent contribution to the
problem by raising demand for inventories, reducing domestic supply
through diversion to export markets, and weakening price incentives
to expand production. Broad indicators—such as unfilled orders and
the ratio of unfilled orders to shipments—were cyclically strong, but
they may themselves have been influenced by the existence of con
trols. While the unusual pervasiveness of shortages in 1973 is strong
evidence that controls contributed to their severity, the controls may
in addition have made shortages more visible by providing a focal
point for public attention.11
Business Practices
There are various ways in which the controls may have altered busi
ness practices and decisions in addition to their direct influence on
prices. It is difficult to judge the importance of these effects either
for their short-term costs or for their longer-term influence. Some
effects, such as changes in accounting practices to obtain greater
flexibility for price increases or changes in production methods or
product mix, mainly involve short-term costs. The costs of other
10 Changes in the spread between prices on domestic and world markets between
1 January 1973 and 30 November 1973 for aluminum, copper, lead and zinc are
shown in Economic Stabilization Program Quarterly Report covering the period
1 October 1973 through 31 December 1973, p. 31.
11 For discussions of specific instances of shortages and inefficiency that were
attributed to controls in a wide range of industry sectors, see the statements
and testimony of representatives from the private sector in Hearings before the
Subcommittee on Production and Stabilization of the Senate Committee on Bank
ing, Housing and Urban Affairs, Oversight on Economic Stabilization and
Economic Stabilization Act—1974, 93d Cong., 2d sess. (30 and 31 January,
1, 6,19, and 21 February, and 6 March 1974).

changes, such as those involved in the consequences of changes in
investment decisions or pricing practices and market structure, may
become evident only after a period of several years.
Changes in cost allocation or accounting procedures designed to
avoid the full impact of controls regulations and the need to develop
specific information for review by stabilization authorities and sup
porting data for compliance auditing imposed costs that could be
estimated by straightforward methods. Business practices that led to
inefficient real resource usage in production and distribution imposed
costs that are more difficult to measure. Purchasing policies designed
to hedge against shortages, or disruption of smooth production flows
when shortages were realized, imposed costs that are more obvious
but not necessarily more important than the costs of inefficient
patterns of input usage. The emergence of bartering arrangements as
a substitute for transactions in the marketplace contributed to ex
cessively large inventories, complicated marketing by increasing infor
mation and search costs necessary to assure timely delivery at the
lowest available prices, and led to less efficient distribution than could
be expected under uniform prices in the marketplace.
An example from ferrous scrap markets illustrates how controls
can reduce efficiency. Steel scrap generated as a by-product of pro
duction operations for large firms was subject to price controls, but
scrap collected from obsolete or worn-out items was not subject to
price controls. Covering all of the junk dealers in the country was
impractical, and higher prices in that market could stimulate increased
scrap collection. Inefficiency in scrap distribution occurred when scrap
subject to controls was sold through bartering arrangements in ex
change for scarce items that it was used to produce, such as concrete
reinforcement bars. In products produced from steel scrap, distribu
tion inefficiencies occurred in response to wide differences in prices.
These prices reflected differences in production costs which depended
on the source and cost of the scrap input as well as on the fraction
of scrap used in furnaces. Another reported business practice, for
which costs imposed are more easily ascertainable, was transshipment
of scrap from an industrial plant at one location to steelmaking facili
ties owned by the same company at another location to avoid sale of
the scrap at controlled prices at one market location and purchases
of a similar quantity at uncontrolled prices at another.12
^ A brief discussion of price controls in the steel industry and a summary of
actions that were taken to modify the regulations is contained in Appendix^ V
of "Removing Controls: The Policy of Selective Decontrol," Historical Working
Papers on the Economic Stabilization Program, 15 August 1971 to 30 April 1974,
Part 2, pp. 942-47.

It was frequently alleged that controls were adversely affecting
production levels, particularly when profit margin limits were an
effective constraint. Evidence based on production levels attained is
ambiguous, because the absolute limits on levels of production capa
bility are usually impossible to define precisely for any firm or indus
try. Levels achieved depend in part on costs of marginal additions
to output compared to prices realized in the market. In addition,
firms operate in a dynamic and changing environment in which they
must make decisions regarding small adjustments in the production
process, expansion of some portion of production operations, or
cutbacks in output by scaling down less efficient operations or close
down of obsolescent plants. Marginal changes in current production
through such decisions over time could have a significant offsetting
influence on price movements. Thus, it is possible that delays in price
adjustments and price ceilings could attenuate production responses
that would otherwise help to smooth adjustments in prices to changes
in demand.
This discussion of controls and their costs can be summarized
by brief consideration of two points. The first point is that the
short-run costs of controls—at least as they were administered during
the Economic Stabilization Program—were apparently not enormous.
Evidence of adverse effects during the period of controls is generally
not readily apparent in broad measures of production or other indica
tors either for individual industries or for the overall economy. Thus,
in spite of widespread reports of shortages, inefficient business prac
tices, and misallocation of resources, normal measures of economic
activity for most sectors did not show pronounced adverse effects that
can be directly traced to controls. The second point is that the costs
of controls are nonetheless real, and they are not adequately captured
by reference only to normal measures of production and economic
activity. Resources are used to administer controls, with costs borne
both by the government and the private sector. Symptoms of ineffi
ciency that can obviously be traced to controls impose additional real
costs, even though these costs are difficult to quantify. In addition,
costs of a more subtle type are obscured by normal measures of
economic activity, because the prices that are used in computing the
value of economic output can be less closely identified with the value
placed by society on measures of economic output as prices diverge
more and more from market values.

100

6
CONTROLS AND
RELATED POLICY ISSUES

Almost inevitably the success of controls as a stabilization tool will be
judged by the public according to the inflation that occurs while they
are in force. The influence of controls is frequently analyzed by
economists to assess the extent to which actual prices diverged from
the prices that would have occurred in the absence of controls. These
analyses are necessarily based on assumptions concerning key
variables— such as federal spending and the rate of monetary expan
sion— that might themselves have been influenced by the presence of
controls. In addition, the divergence between projected and actual
inflation has often in recent years been larger than could be attributed
to incorrect assumptions about key variables. Both of these con
siderations— the effects of controls on key variables and the unex
plained divergence between projected and actual inflation—dilute the
confidence that can be placed in econometric estimates of the marginal
influence of controls. Moreover, the potential marginal influence of
controls on inflation depends on the extent to which their existence
influences other economic policies, such as farm policy, and the degree
to which policy objectives such as equity, efficiency, and availability
of goods and materials are subordinated to short-run inflation
concerns.
Whatever direct impact the controls regulations had on wages
and prices, controls also influenced the context in which economic
policy was made. To the extent that the controls temporarily sup
pressed price and wage increases, the full influence of market forces
became evident to policy makers and the private sector only after some
delay. To the extent that market pressures in specific sectors led to
rapid price increases or dislocations under the controls, high-level
attention was focused on possible policy changes that could influence

101

supply or demand to relieve the pressures placed on controls by a
market environment that was forcing prices up. Thus, the controls
at times facilitated the development of specific policies that could help
to reduce market pressures by shifting supply or demand—policies
that were usually more complex but more promising than a simple
limitation of short-run price or wage increases. Issues raised by this
broad economic role of controls may be of more lasting importance
than quantification of their direct effects on prices and wages in any
period.
Controls and Demand Management
The possibility that the existence of a program of wage and price
controls may have influenced the expansiveness of monetary apd fiscal
policy is of particular importance for evaluating the full influence of
controls on inflation. Indeed, one of the thorniest issues in any
attempt to assess the quantitative effects of controls is the issue of
what components of economic policy should be treated as independent
of controls. It is possible, for example, that controls were viewed as
providing some short-run insurance against inflation, thereby shifting
the balance toward accepting the risks of more expansionary policies
than would have been planned in their absence. Controls may also
have suppressed inflation sufficiently to mask for a time inflationary
pressures building up in the economy, and consequently they may
have delayed a recognition by policy makers that less expansionary
policies were called for.
The effect that controls may have had on macroeconomic policy
can be explored by examining some evidence concerning the period
1971-74. Even though no definitive conclusions can be drawn from
them, official statements suggest that controls were regarded as pro
viding a measure of protection against inflation, thereby permitting
a more expansionary pattern of policies than would otherwise have
been considered prudent.1 The imposition of controls was also accom
panied by requests for investment tax credits and tax reductions to
stimulate the economy. In addition, the most widely used explanation
of the manner in which controls were expected to help reduce infla
tion was that a major portion of the continuing inflation in 1971 could
be attributed to the lingering effects of past inflation. The price and
wage projections from standard models made it difficult to account for
the rate at which inflation was occurring prior to controls on the
1 Economic Report of the President, 1972, p . 69, pp. 101-102.

102

basis of demand conditions prevailing before the controls were
imposed. The controls were viewed as reducing expectations of infla
tion by providing a period of lower inflation more consistent with
the degree of slack in labor and product markets. Yet the risks of
placing too much reliance on controls and moving toward overly
expansive policies were also explicitly recognized and cautioned
against.2
The extent to which inflation was actually suppressed by the
controls (when measured against price levels that would have been
sustained by competition in the marketplace) is uncertain. The limits
that were placed on prices under controls, along with incentives to
keep prices down voluntarily (either out of a spirit of cooperation or
to avoid confrontation and possible audit for violations), inhibited
market testing. Market signals were muted, and information on
accumulating market pressures was received only after delays which
added new uncertainty to government policy planning. This influ
ence of controls was of uncertain importance during the period 1971
to 1974, but it may have delayed a turn toward more restrictive
demand management policies.
Both monetary and fiscal policies were expansionary during the
early phases of controls. These policies were generally viewed as
appropriate for stimulating higher output and employment levels,
particularly in the early stages of the recovery when fiscal policy was
most expansionary. Federal deficits averaged $19 billion in 1971 and
1972, although the full employment deficit averaged only $5 billion,
and small surpluses were achieved on both bases in 1973.3 The net
expansionary effect of tax and expenditure changes introduced with
the New Economic Policy on the budget was estimated as $1.1 billion
for fiscal year 1972,4 a small impact compared to actual deficits at
that time. Monetary policy remained expansionary during almost
the entire period; the money supply increased at an average rate of
about 7 percent, but the most rapid expansion took place in the latter
part of 1972. Although in retrospect these policies seem to have been
overly expansionary, particularly in the latter part of the period, the
mistake appears to have resulted mainly from the deficiencies of eco
nomic forecasts rather than from policies that differed from those on
which the forecasts were based. The upsurge in inflation that began in
1973 was not foreseen by professional forecasters.0
2 Economic Report of the President, 1973, p. 53, and Economic Report of the
President, 1972, p. 96.
3 Economic Report of the President, 1974, p. 31.
4 Economic Report of the President, 1972, p. 71.
5 Appendix A of the Statement of Dr. John T. Dunlop, p. A-l.

103

Controls and Other Stabilization Policy Initiatives
The introduction of controls in the U.S. economy, and intermittently of
incomes policies of various kinds in other countries/ is less a tribute to
their demonstrated durability and effectiveness than to the lack of
constructive alternatives for responding to public pressures to "do
something" that would have a visible and direct effect on inflation. It
is appropriate that these pressures should converge on the government
in democratic societies, and the government should give high priority
to actions and policies that can help to contain inflation. Whether the
imposition of generalized wage and price controls is the most con
structive response in most instances, however, is open to question. It
would be desirable to place more emphasis on the development of
imaginative policies that would help to identify and attack the real
economic problems of our society. Policy approaches that could help
to increase supply, reduce costs, facilitate adjustment, or improve pro
ductivity would work more slowly and indirectly to reduce inflation,
but such policies would also have less potential for simultaneously
imposing costs through reduced efficiency and disappointing public
expectations.
The establishment of a system of wage and price controls has,
however, facilitated the formation of institutional structures for
bringing together representatives of labor, business, the public sector,
Congress, and the executive branch, in order to identify and discuss
problems and explore possible approaches from different viewpoints.
Since the cooperation, support, acquiescence, and expertise of each
of these groups is necessary in varying degrees to the success of the
effort (particularly the cooperation of organized labor), controls pro
vide a framework for mobilizing public interest and attitudes and
promoting serious exchange of views, statements of positions, and
negotiation of compromise approaches. The Pay Board and advisory
committees of Phase II, along with earlier exploratory meetings, the
Construction Industry Stabilization Committee, and the LaborManagement Advisory Committee and tripartite committees in the
food and health sectors during Phases III and IV provided some of the
major forums for addressing broad policy issues and individual cases.
While the existence of a program of wage and price controls
provided the immediate impetus for identifying and bringing together
spokesmen representing various interests and involving them in the
process of working toward solutions, controls may not have been a
necessary precondition for establishing effective structures for policy
discussions and problem solving. The Construction Industry Stabili
zation Committee (which could draw upon authority for direct con
104

trols before broader controls were imposed) and the Food Wage and
Salary Committee (which could not do this after controls for most
sectors were terminated) are examples of structures developed to deal
with specific problem areas. It might be possible to establish similar
structures in other instances, and these might contribute to the work
ing out of industrial relations problems and the rationalization of
wage patterns without authority for mandatory controls. Structures
such as labor-management advisory committees set up to play a
consultative and supportive role in the formation of national economic
policy have often made modest but valuable contributions. The
Conference on Inflation in September 1974 represents another ap
proach to public dialogue on problems and issues. While controls
have mobilized active participation and sometimes provided support
for compromises by those representing relatively narrow interests to
facilitate the achievement of broader goals, cooperation and participa
tion in the resolution of many problems might often be elicited with
out the spur of comprehensive price and wage controls.
The stabilization program during the period from 1971 through
1974 also provided structures within the federal government for
bringing together cabinet members responsive to different constitu
encies, a staff capability to identify for discussion policies that con
tributed to inflation, and a cabinet-level spokesman to focus attention
on the inflationary implications of policy decisions. The main forum
for internal policy review during Phase II was the Cost of Living
Council itself, while the food and health policy committees were the
most important forums during other phases of the program.
Controls, with their potential for market disruption, provided
strong incentives to search for policy actions that could increase
supply or restrain demand and thus reduce inflation. But the develop
ment of ways for the federal government to focus more attention on
the inflationary consequences of government policy actions should
not be dependent on controls. Controls on food prices are certainly
not a necessary condition for systematic consideration of the potential
impact on inflation of federal farm policy, an area in which federal
government policy decisions are of major importance for production
and prices. The Council on Wage and Price Stability, in some respects
a successor to the Cost of Living Council, may contribute to the
evolution of an internal governmental structure for discussion, review,
and action on economic policy issues influencing inflation. The pro
cedures for systematic budget review adopted by the Congress may
also contribute to improved price stability.
The resurgence of inflation in 1973 gave new impetus to a search
for ways in which productivity could be improved to relieve the pres

105

sure of rising costs on controls. Stabilization committees often pro
vided a labor-management structure for the discussion of promising
approaches and served as a catalyst for their implementation.6 The
rise toward capacity production levels, particularly in many of the
basic materials producing and processing industries in early 1973,
focused attention on the question of whether sufficient resources were
being devoted to capital investment. Adequacy of capital investment
and the contribution that additional new investment could make to
improved productivity growth were two considerations that formed
the background for the sectoral decontrol process during the last part
of 1973 and early 1974. Adequacy of rates of return and willingness
to make new investment commitments were factors considered in
decontrol decisions. Securing capacity expansion commitments as
controls were removed was part of an intricate process to facilitate
orderly sectoral decontrol. Investment commitments provided a sup
porting rationale for sequential decontrol decisions, and they repre
sented a significant effort to coordinate policies for achieving capacity
expansion needs with policies for removing controls.7
Because the controls imposed limits and delays on price increases
and because the regulations included limits on profit margins, invest
ment decisions could have been adversely affected by controls. The
influence that controls actually had on business investment, however,
is not clear. Several factors suggest that their effects on reducing
investment were small: the perceived short-term character of the
controls, the influence of longer-term price and cost prospects on
many investment decisions, the initial favorable attitude of the busi
ness community toward controls, and the apparently small impact of
the controls on prices during 1972, particularly for industries pro
ducing basic materials where capacity limitations became most ap
parent in 1973. Other factors, however, suggest a larger effect: the
full effect of prices in signaling increased profitability of investment
was reduced to the extent that some prices were held below market
levels, cash flow to finance increased investment was reduced, lower
profitability impeded external financing, and incremental decisions to
alter production operations or keep marginal production facilities in
operation may have been affected. In the administration of controls,
6 Such initiatives were facilitated by the fact that the director of the Cost of
Living Council at that time also served as chairman of the Productivity Com
mission.
7 See "Removing Controls: The Policy of Selective Decontrol" in Historical
Working Papers on the Economic Stabilization Program, 15 August 1971 to
30 April 1974, Part 2, pp. 859-948, for a detailed discussion of the decontrol
process.
106

policies regarding investment evolved from the maintenance of as
neutral a policy as possible during the early stages of controls to the
explicit encouragement of new investment in decontrol decisions.
There was no apparent weakness in business investment during the
controls period, a fact that may be attributed mainly to the "tem
porary" nature of the controls and to their initial favorable effect on
public confidence.8
The flow of investment decisions in the economy plays a sig
nificant role in cyclical movements in demand. The investment tax
credit introduced with the New Economic Policy was aimed at least
as much toward stimulating demand as toward the need for providing
increased productive capacity. Moreover, the capacity problem that
emerged in 1973 was concentrated in the basic materials sector
instead of being spread throughout the economy. These develop
ments were apparently not foreseen by the firms in the industries
concerned, and they were only belatedly recognized by the govern
ment. Improved forecasts of capacity needs could have helped to
reduce inflation from this source as well as to smooth investment flow
and its impact on aggregate demand. Better information on actual
production capacity could contribute to more informed assessments of
capacity needs. The influence of safety and environmental legislation
on the relation between total investment and additions to actual physi
cal output capacity has also increased in recent years. (Capital
expenditures made for pollution control do not increase capacity.)
Moreover, in developing projections of potential output to guide shortrun demand management policies, measures of industrial production
capacity may be as important as measures of employment conditions.
While there is little reason to assume that capacity needs for particular
industries could be foreseen any more accurately by a government
agency than by firms and investors in the private sector, more detailed
and carefully assembled information might contribute to an improved
assessment of intentions and prospects by both the government and
private sectors.
Controls and the Public
When inflation becomes an issue of public concern, price increases
for particular products come to be looked at mainly from the point of
8 Some evidence of a possible small favorable influence on investment during the
controls period is contained in Roland G. Droitsch, "The Impact of the Economic
Stabilization Program on Business Fixed Investment," Historical Working Papers
on the Economic Stabilization Program, Part 2, pp. 949-988.

107

view of their contribution to inflation instead of from the point of
view of their role in allocating resources in response to reduced
supply or increased demand. The existence of formal controls pro
vides a channel for responding to public and political pressures to
deal with particular price increases. The temptation is strong to apply
rigid controls to specific products, to set limits on the size of indi
vidual price increases, or to apply tight rules for sectors in which
increased stringency can make no contribution to the real problem.
For example, the policy response to the fact that lumber prices were
rising more rapidly than most other prices in 1972 was to apply more
stringent controls, when decontrol might have made a greater con
tribution toward the underlying problem of supply. Restraining
prices in sectors where demand pressures could not be accommodated
through short-term supply increases was generally inconsistent with
the broad approach of Phase II, but it was as awkward politically to
exempt lumber prices then as it was easy to exempt them in 1973
when lumber prices were falling.
The retention of mandatory controls on food prices for Phase III
provides an example of controls policy oriented more toward the
presumed adverse political reaction to voluntary, self-administered
controls on food prices when food prices were expected to rise signifi
cantly than toward the economic contribution that continued manda
tory controls on food prices could be expected to make. The public
impact of retention of mandatory controls on food prices was appar
ently small, because the public was not persuaded by statements
explaining how the surge in food prices could not be attributed to the
shift to Phase III in view of continued mandatory controls on food
prices. Until ceiling prices were imposed for meat, the continuing
mandatory controls on food prices were structured to permit pass
through of costs, and they had little disruptive effect on markets
because they permitted large price increases. The meat ceilings were
addressed in part to another goal—preservation of wage/cost
stability— and their influence on wage trends should be weighed
against whatever costs they imposed on the economy. Continued
mandatory controls on food prices may also have assisted the govern
ment in managing its internal policy decisions to increase supply.
They may also have increased the acceptability of these policy changes
to some segments of the food industry.
The shift in public attitudes reflected by congressional debate
and action between the first half of 1973 and the last half of 1973
through early 1974 leads one to ask whether the political process
will permit implementation of controls in a manner seeking to avoid
108

distortions and inefficiency in the economy.9 A significant shift in
public attitudes toward the merit of stringent controls did not occur
until after the graphic illustrations of market disruptions and adverse
effects on supply that occurred during the freeze beginning in June
1973. These demonstrations of the futility of stringent controls under
the conditions prevailing then and the shortages that emerged later in
the year apparently led to increased recognition that stringent controls
could be counterproductive.
Limitations of Controls
One of the most fundamental but often misunderstood features of
controls is the limited potential they have for contributing to lower
inflation— that is, lower inflation than would have occurred in their
absence and without the adverse side effects that most of their pro
ponents would prefer to avoid. Under emergency conditions (such as
a major war effort) the scale of the diversion of resources that must
be accomplished is sufficiently large that major strains are inevitable,
and the inefficiency and inequity of controls and rationing may be
more tolerable than other methods of securing the necessary adjust
ments. The goals of peacetime incomes policies in Western industrial
societies, however, have been much more limited than containment
of the inflationary effects of wartime resource diversion. Direct
controls on prices and wages to effect the goals of incomes policies
have usually been viewed as a supplement to reliance on pricing in
the marketplace, although admittedly in some economies they have
been viewed as an essential supplement. Draconian systems of con
trols have generally been avoided, except for short periods, both
because their effects are not tolerated for long by the major par
ticipants in the economy and because the costs they impose on the
economy exceed any benefits that might be achieved through lower
inflation.
The manner in which controls are expected to affect the process
of inflation is usually not carefully articulated in discussions of the
possible contribution of incomes policies. In some instances reference
9 Most of the significant legislative initiatives in Congress before mid-1973 were
intended to tighten controls. After mid-1973 most were intended to relieve the
pinch of controls; many bills and resolutions to end controls were introduced, and
several resolutions or bills were introduced to provide relief from controls in
sectors such as food, fertilizer, petrochemicals and steel. See the listing of
legislative activities from 1 May 1973 to 30 April 1974 in Appendix C of/'Con
gress and Controls/' Historical Working Papers on the Economic Stabilization
Program, Part 1, pp. 220-243.

109

is made to market power and to a range of discretion that may exist
in establishing administered prices or negotiating wage increases for
large economic units-10 Of course, the existing structure of markets
falls short of fully competitive conditions and results in price and
wage relationships that depart from those that would prevail under
fully competitive conditions. If controls are aimed primarily at off
setting these departures from fully competitive price and wage rela
tionships, their limited influence over inflation and the strains they
would be confronted with should be viewed in perspective. For ex
ample, if profits for 20 percent of the private nonfarm business sector
(and 20 percent represents a generous estimate of the proportion that
would be described by some as characterized by "administered"
prices) had been held at their 1970 cyclical low until 1972, only
six-tenths of a percentage point would have been shaved from the
cumulative increase in prices during the two-year period in which
profits in that sector rose by 20 percent. Aiming controls toward
offsetting noncompetitive wage/price relationships would compel ex
plicit attention to the question of whether rates of return were
adequate to support investment and maintenance of production
capacity in the sectors affected. A one-time reduction in prices and
rates of return of this kind would, of course, make no continuing
contribution to reduced inflation. This estimate, of course, assumes
no changes in other factors, and it does not adequately reflect the
possible influence of such a policy on the dynamics of price changes.
In any case, the short-run dynamics of inflation are not well under
stood, so the full influence of such a policy would be difficult to
predict.
The possible contribution of controls in effectively reducing
relative wages in some of the more highly organized, high-wage
sectors of the economy is more difficult to assess because wage
structural linkages extend well beyond the employee units that might
be placed in this category. If wage increases of 10 percent of the
private nonfarm work force were depressed to one-half of the average
rate of wage increase during two years of the controls, the direct
effect on private nonfarm prices would have been only four-tenths
of a percentage point on prices, although the impact through indirect
effects on other wages could be quite large. Yet such a policy could
be maintained only until the influence on relative wages of labor
market power was offset, and there would be no further continuing
influence on the rate of inflation. An approach designed to alter
relative wage relationships under controls would obviously need to
10 Economic Report of the President, 1962, p. 185.

110

be much more subtle than is suggested by the arithmetic describing its
potential direct impact. Even if a realignment of relative wage posi
tions could be achieved by use of controls, the forces that generated
the prevailing patterns are undoubtedly strong and would pose a
continuing threat of labor strife to re-establish the previous wage
differentials.
Except for very short periods, the impact on prices of restricting
pass-through of increased costs and squeezing corporate profits is
much smaller than seems to be generally recognized. The cumulative
rise in prices attributable to inflation within the corporate nonfinancial
sector between the beginning of 1971 and the end of 1973 was 8.7 per
cent. If profit margins had been held to their low cyclical position
at the beginning of the period, the rise in prices would have been
reduced by less than one percentage point
Incomes policies could also be developed that are not oriented
toward restructuring broad relative price or wage relationships. These
policies could be directed toward a roughly parallel reduction in infla
tion across all sectors. The controls of 1971-74, for example, were
initially designed to limit price adjustments throughout the economy
to the magnitude of short-term cost increases and to influence the
size of cost increases primarily by establishing a standard to reduce
the size of wage increases. This was viewed as an approach that
would help achieve an actual reduction in inflation during a period
in which generalized excess demand was not an immediate threat.
Revision of expectations and the development of contracts and prac
tices reflecting lower rates of inflation were expected to exercise a
stabilizing influence, similar in kind but opposite in direction to the
influence that was attributed to the buildup of inflation in the late
1960s on price increases in 1970 and 1971.
Price developments in 1973, particularly the surge in food prices
and the large increases in basic materials prices and petroleum prices
later in the year, created a vastly different economic environment
from what had been projected. These price developments should not
necessarily be regarded as a challenge to the validity of the concepts
on which the controls were initially based, nor should they necessarily
be regarded as a demonstration of the inappropriateness of the
limited purposes of the controls under the conditions that were pro
jected in 1971. Instead they serve as a reminder of the crucial im
portance for short-term price performance of market developments in
a limited number of critical sectors, such as food and energy. More
generally, they serve as a reminder of the flexibility of the price
system as a mechanism for promoting rapid adjustments to change in

111

the marketplace. The price surge that began in 1973 also indicated
that, whatever contribution controls may have made during 1972,
they could have little marginal influence under the conditions that
emerged in 1973 unless controls policy was shifted toward establish
ing rigid ceilings and supplementing the ceilings with subsidies and
nonprice rationing mechanisms as necessary—which would of course
have been a policy with an entirely different conceptual basis.
Controls may in some instances make a limited contribution
toward facilitating adjustment to lower inflation when no large shifts
in supply or demand are projected. Such a contribution could be
made by altering public expectations of inflation, for example, if
inflationary expectations are an important source of momentum in
price and wage increases. Controls are vulnerable to serious failure,
however, by neither containing inflation nor avoiding potentially
costly inefficiency when major supply or demand shifts occur. The
normal function of the market system, of course, is to generate auto
matic adjustments of prices and consumption to changes in market
conditions—changes that are constantly occurring and usually not
accurately foreseen. This raises the question of whether the costs that
controls may impose before they can be gracefully terminated, or
over time if continued indefinitely, may exceed the benefits of what
ever limited contribution they may make.

112

7
SUMMARY AND
CONCLUSIONS

Economic stabilization policy in the period 1971-74 was shaped by
both economic considerations and political forces. Controls on wages
and prices were reluctantly imposed by the administration in August
1971 as an anti-inflation initiative to complement other policy actions,
since the policies that were introduced to stimulate expansion in
aggregate demand and to deal with the international payments
imbalance would both tend to raise inflation. The threat of an inter
national financial crisis—the economic problem with most imme
diacy—was addressed by suspension of the convertibility of the dollar
into gold. Public concern about the level of unemployment and rising
public support for direct intervention in wage-price policy provided
the major impetus for the expansionary fiscal policy proposals and
the price and wage controls. It was recognized that controls could
contribute to slower inflation by reducing inflationary expectations
and by helping to ensure that wage and price inflation would in fact
subside in line with several favorable factors in the outlook. The
decision to impose controls was based on a judgment that the pro
gram could be a constructive response to public pressures for an
"incomes policy/' but this judgment was tempered with a recognition
that the effectiveness and durability of controls would reflect their
limitations as an economic stabilization tool.
The Phase II controls of 1972 were designed and administered to
contribute as effectively as possible to achieving lower inflation, but
a strong emphasis was also placed on minimizing bureaucratic inter
vention in particular wage and price decisions and on avoiding adverse
side effects such as market disruption, distortions, or shortages. More
over, the controls were intended from the outset to be a short-term
policy tool and not a permanent institutional structure to alter the

113

price and wage setting process. The shift to Phase III in 1973 as a
step toward gradual removal of controls failed to achieve that objec
tive, however, because a new surge in inflation began that brought
with it increasing pressure to reinstate tougher controls.
The June 1973 freeze followed by Phase IV represented a tem
porary reversal in the direction of controls policies. Recourse to the
freeze and to mandatory controls was largely a policy response to the
widespread public perception that the resurgence of price inflation
was to an important extent attributable to the termination of Phase II
and the changes in the administration of the controls that were intro
duced at that time. These public attitudes were reflected by initiatives
in the Congress threatening drastically more rigid and stringent con
trols, and the freeze was imposed in reaction to these developments.
During the freeze and the stringent controls that followed, it became
increasingly recognized by the public that controls could not prevent
a rise in inflation without causing serious market disruption and
adverse effects on supply. This gradual shift in public attitudes con
tributed to public acceptance of gradual, selective decontrol in late
1973 and early 1974 in spite of the rise in inflation to rates above
10 percent.
During 1972, the policy approach designed to minimize market
disruption, shortages, and other unfavorable side effects of price and
wage controls had been consistent with achieving reduced inflation.
In 1973, however, when the market environment became unfavorable,
a rise in inflation could not be averted by the move to controls more
stringent than those of Phase II, in spite of a policy approach in
administering the controls in which relief was not generally granted
unless potentially serious market disruptions or shortages were in
prospect. Administration of the controls with a sensitivity to avoid
ing serious distortion of relative prices, shortages, and other adverse
side effects was desirable on economic grounds, but public pressures
and congressional initiatives to relieve the pinch of controls in the
second half of 1973 provide a strong indication that a less sensitive
policy approach would also have failed to receive political acceptance.
The limits on stringency in administering the controls that were
set by the political context and by economic goals other than short
term containment of inflation meant that the controls could be
expected to have only a marginal influence on price performance. The
data on construction wages and health care costs support a conclusion
that controls significantly reduced inflation in those sectors in both
1972 and 1973. In 1972, they temporarily suppressed inflation in
some other sectors such as lumber, and they may have contributed
114

marginally to lower inflation throughout the economy by dampening
inflationary expectations and moderating wage increases. In addition,
controls may have helped to ensure that actual price and wage devel
opments in 1972 were within the range that could be expected on
the basis of factors such as improved balance in the wage structure
and a cyclical rise in productivity growth—factors which also con
tributed heavily to the appearance of success that was achieved by
the Phase II controls.
In 1973 a marked change in the market environment brought
about conditions in which rising price inflation could not be con
tained by controls without serious adverse side effects. The major
factors were strong domestic demand supported by high monetary
expansion rates in 1972, the decline in world food supply, strong
cyclical demand in international markets, the decline in the foreign
exchange value of the dollar, pressures on production capacity in
many basic materials industries, and, late in 1973, the oil embargo
and the massive rise in oil prices put into effect by the cartel of major
oil-exporting countries. With the rise in inflation the controls ap
peared unsuccessful, and since the rise in inflation coincided closely
with the shift to Phase III, the Phase III controls were widely regarded
as ineffective.
Public and political attention was focused primarily on the
apparent ineffectiveness of Phase III controls, perhaps partly because
the changes in market conditions in 1973 and their implications for
prices were not foreseen or initially fully recognized even by those
forecasting or interpreting economic trends. However, the changes
that were occurring in the marketplace during 1973 made it impossible
to contain inflation within a range comparable with that experienced
during Phase II without controls that were based on a radically dif
ferent and more stringent approach in which other economic goals
were very heavily subordinated to short-term inflation control.
Analysis of data on prices, costs, productivity and profits indicates
that the rise in inflation in 1973 occurred as a result of changes in
underlying economic factors, and not as a result of business pricing
practices that violated the stabilization regulations and pricing con
cepts that had been applied since the beginning of the program.
Because the rise in inflation in 1973 resulted from changes in the
market environment and not from a breakdown in cooperation and
compliance with the stabilization regulations, continuation of the
Phase II controls could have done little to moderate inflation in early
1973. For the same reasons, the shift to more rigid and stringent
controls in the second half of the year was accompanied by continued

115

high inflation in spite of the rising incidence of shortages and dis
tortions which reflected prices held below market clearing levels.
Indications that controls were keeping prices below levels they
would have reached in the absence of controls were more prevalent
in late 1973 than they had been in 1972. Evidence that prices were
held below market clearing levels in late 1973 included widespread
reports of shortages, black markets or "gray" markets, and difficulties
in obtaining supplies and materials. Whatever marginal influence on
prices the controls may have had in 1973, however, was dwarfed by
the faster pace at which prices were rising.
Administering a system of wage and price controls involves
making decisions on particular prices and wage situations. Circum
stances surrounding particular wage situations are usually viewed by
the parties to the wage adjustment as being sufficiently unique so that
they cannot be satisfactorily dealt with by even a fairly complex
system of rules and procedures, but are instead properly the subject
for bargaining and negotiation. Market pressures for price increases
or requests for increases in particular prices by individual firms must
be dealt with in the context of cost conditions, market demand, and
other applicable factors. Only a fraction of the information that was
available to those intimately familiar with their firms or industries,
and which would be reflected by pricing in the marketplace, could be
assembled to guide decisions on particular prices by those adminis
tering the controls. The information that could be assembled for
particular cases often brought into sharp focus the dilemma of
choosing between either a rise in price or the threat of shortages,
distortions, or adverse effects on supply or investment. Particularly
during 1973, analysis of specific price situations revealed few in
stances in which any appreciable effect on prices could be obtained
by limiting or delaying increases without a strong potential for
disrupting markets, impairing efficiency, or reducing supply.
The acceleration of inflation that began in late 1972 and early
1973 stimulated an emphasis on and search for policies that could
improve the market environment for controls by relieving pressures
that were causing prices to rise. The potential for adverse side effects
that would result from attempts to contain inflation instead by more
stringent controls may have contributed to this emphasis. A wide
range of actions was taken to increase supply including removal of
beef import restrictions, expansion of timber supply from the national
forests, and sales of stock-piled materials. The most significant of
these actions aimed at relieving market pressures by increasing supply
was in the area of federal farm policy, where the major liberalization
116

that occurred in late 1972 and early 1973 may have been facilitated
by the presence of controls. While these policies were not sufficient
to prevent a major surge in inflation in 1973 and 1974, they kept the
surge smaller than what might otherwise have occurred during that
period.
The full effects of the controls during the period 1971-74 are not
easily measured. Analysis of their effects is complicated by the fact
that controls displaced the path of inflation over time and indirectly
influenced other policies. The marginal effects of controls on inflation
while they were in force cannot be measured with any precision,
because little confidence can be placed in the accuracy of estimates of
the course inflation might have taken if there had been no program
of wage and price controls. Among the sectors in which controls seem
to have deflected inflation trends, however, the most significant were
construction wages, health care costs, and since 1973, petroleum
product prices. The controls, of course, temporarily suppressed wage
and price increases in several other sectors. The most durable impact
on restraining inflation through controls probably occurred through
their influence on construction wage increases, although some lasting
moderating influence on wages may also have occurred more generally
in other sectors in which restraint was accompanied by improved
balance in the wage structure or more constructive industrial relations
practices.
Both economic considerations and political factors placed limits
on the aggressiveness and stringency with which wage and price
controls policies could be administered by the government. Even
during a period in which inflation was clearly an issue of serious
concern, public opinion and congressional attitudes also appropriately
reflected concern for other economic and social goals, particularly
when adverse effects of controls became evident Concerns other
than short-term price inflation included the avoidance of serious
market disruption and reduced efficiency, preservation of institutional
arrangements such as collective bargaining and markets in which the
interplay of supply and demand largely determine price, production
and investment decisions, and maintenance of the freedom in private
decision making that these institutional arrangements permit. In this
context only a small, and usually temporary, influence on inflation
could be expected in most sectors through controls. This review of
experience during the period 1971-74 indicates that a more significant
impact on inflation by controls that place limits on wage and price
increases could only have been achieved if there had been a more
pronounced subordination of other important goals than was con
sidered acceptable under the Economic Stabilization Program.

117

APPENDIX
List of Appendix Tables
A-l.

Percentage Increases in Hourly Earnings and Negotiated Wage
Rate Increases in Major Collective Bargaining Settlements,
1968-73 120

A-2.

Effective Wage Adjustments in Manufacturing

A-3.

Profits and Profit Margins for Selected Industries: Annual and
Cumulative Changes, 1971-73 122

A-4.

Prices and Their Relation to Profits for Selected Industries:
Annual and Cumulative Increments, 1971-73 123

A-5.

Output per Man-Hour Changes and Profit Margins in Manu
facturing: Annual and Cumulative Changes, 1971-73 124

A-6.

U.S. Exports of Pork to Major Markets, by Months,
1972-74 125

A-7.

U.S. Exports of Live Cattle to Canada, by Months,
1971-74 126

A-8.

U.S. Imports of Beef and Pork from Canada 127

121

A-9.

Meat Price Specials as Measured by Price and Volume Effects,
1971-74 128
A-10. Softwood Lumber Production, Net Trade and Stocks,
1971-74 129
A -ll. Cattle Hide Prices and Exports, 1971-74

131

List of Appendix Figures
A-l.

Changes in Prices and Unit Labor Costs and Difference in
Changes for Nonfinancial Corporations, 1959-73 132

A-2.

Changes in Price and Unit Labor Costs and Difference in
Changes for the Private Nonfarm Sector, 1950-73 133

A-3.

Prices of Major Agricultural Commodities, 1971-73

134
119

Table A-1
PERCENTAGE INCREASES IN HOURLY EARNINGS AND
NEGOTIATED WAGE RATE INCREASES IN MAJOR
COLLECTIVE BARGAINING SETTLEMENTS, 1968-73
1968

1969

1970

1971

1972

1973

6.6

6.7

7.0

6.3

6.2

All industries
First year
Deferred

7.4
4.6

9.2
5.4

11.9
5.8

11.6
7.7

7.3
6.0

5.8
4.8

Construction
First year
Deferred

8.7
n.a.

13.1
n.a.

17.6
10.1

12.6
13.1

6.9
11.6

5.0
7.3

7.0
3.9

7.9
4.0

8.1
4.6

10.9
4.8

6.6
4.5

5.9
4.4

7.6
n.a.

9.6
n.a.

14.2
5.2

12.2
7.6

7.5
7.3

6.0
5.0

Average hourly earnings,3
private nonfarm
Wage rate increases under
collective bargaining
agreements15

Manufacturing
First year
Deferred
Nonmanufacturing
(excluding construction)
First year
Deferred

a Adjusted for overtime (in manufacturing only) and interindustry employment
shifts.
b Limited to private settlements covering 1,000 workers or more. Data for 1973
are preliminary. Comparable data for years prior to 1968 are not available.
Source: U.S. Department of Labor, Bureau of Labor Statistics.

120

Table A -2
EFFECTIVE WAGE ADJUSTMENTS IN MANUFACTURING
(median changes, percent)

Year

All
Union

Nonunioni

Union/Nonunion
Difference

1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972

2.7
2.6
2.6
2.2
2.9
3.2
4.0
5.0
5.0
5.7
6.1
5.2

1.0
1.6
2.8
2.0
3.2
3.9
4.6
5.0
5.1
5.1
4.7
5.0

+ 1.7
+ 1.0
-0 .2
+ 0.2
-0 .3
-0 .7
-0 .6
0.0
-0.1
+ 0.6
+ 1.4
+ 0.2

1961-64
1965-69
1970-72

Average Annual Effective Wage Adjustments
+ 0.7
1.8
2.5
-0
.4
4.4
4.0
+
0.8
4.9
5.7

Note: Effective adjustments include cost of living adjustments, new increases,
deferred increases, and decreases or no-change situations.
Source: U.S. Department of Labor, Bureau of Labor Statistics.

121

Table A -3
PROFITS AND PROFIT MARGINS FOR SELECTED
INDUSTRIES: ANNUAL AND CUMULATIVE CHANGES,
1971-73
($ billions at annua! rates)
Calculated Increments to Profits

Change in
Corporate
Profits
( 1)

ANNUAL
All industries
1971
1972
1973
Manufacturing
1971
1972
1973
Agriculture
1971
1972
1973
Wholesale and
retail trade
1971
1972
1973
CUMULATIVE a
All industries
1972
1973
Manufacturing
1972
1973
Agriculture
1972
1973
Wholesale and
retail trade
1972
1973

13.5
19.7
35.2
4.3
8.4
5.2

To maintain
constant
percentage
margin
( 2)

Change in
percentage
profit
margin
(3)

12.6

16.8
22.7

.9
2.9
12.5

1.0

3.3
5.5

2.9
4.4

Difference
between constant
percentage and
constant dollar
profit margin
(4)

7.4
6.2

11.4
A
.1

.4
.1

1.0
3.3
19.1

1.0
2.1

10.5

0.0
1.2
8.6

2.3
9.5

2.9
1.8
2.8

2.4
2.5
3.1

.5
- .7
- .3

1.4
.4

19.7
54.9

16.8
39.1

2.9
15.8

17.7

8.4
13.6

2.9
6.7

5.5
6.9

3.3
22.4

12.0

2.1

1.2
10.4

2.3
11.3

1.8
4.6

2.5
5.7

- .7

.4
2.5

1.1

2.0
6.2

Note: Profits figures refer to profit type income, which consists of corporate
profits including inventory valuation adjustment, proprietors’ income, rental in
come of persons, and surplus of government enterprises less subsidies. Output
is measured in terms of value added as reported in the national income accounts,
a Annual changes may not sum to cumulative totals because of rounding and
cumulative totals for components may differ in addition because they are cumu
lated on the basis of the percentage margin prevailing in 1971.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.

122

Table A -4
PRICES AND THEIR RELATION TO PROFITS FOR
SELECTED INDUSTRIES: ANNUAL AND CUMULATIVE
INCREMENTS, 1971-73
Calculated Increments to
Price Change
Change in
Implicit
Price
Deflator

(1)

ANNUAL
All industries
1971
1972
1973
Manufacturing
1971
1972
1973
Agriculture
1971
1972
1973
Wholesale and
retail trade
1971
1972
1973
CUMULATIVE3
All industries
1972
1973
Manufacturing
1972
1973
Agriculture
1972
1973
Wholesale and
retail trade
1972
1973

Change in
percentage
profit
margin

(2)

Difference between
constant percentage
and constant dollar
profit margin

fl)

4.6
3.3
5.6

.1
.3
1.0

.7
.5
.9

1.7
.4
.9

1.3
1.9
.3

.2
0.0
.1

.7
15.2
48.4

.1
3.5
21.2

.4
6.9
23.4

5.5
1.3
6.6

.3
-.4
-.1

.8
.2
1.0

3.3
9.1

.3
1.3

.5
1.5

.4
1.4

1.9
2.2

0.0
0.1

15.2
71.0

3.5
29.6

6.9
32.2

1.3
8.0

-.4
-.5

.2
1.2

a Annual changes may not sum to cumulative totals
are cumucumulative totals for components may differ in addition
lated on the basis of the percentage margin prevailing in i s / 1.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.

123

Table A -5
OUTPUT PER MAN-HOUR CHANGES AND
PROFIT MARGINS IN MANUFACTURING:
ANNUAL AND CUMULATIVE CHANGES, 1971-73
Calculated Increments
to Profits
($ billions at annual, rate)
Annual
Percentage
Change in
Output per
Man-hour

Difference between
Trend Rate and
Short-Term Output
per Man-hour
Change3

Difference in
rates of output
per man-hour
changeb

Change in
percentage
profit
margin

(2)

(3)

(4)

6.8
6.4
5.9

3.4
3.0
2.6

6.4
6.3
6.0

3.3
5.4
.8

6.4
12.4

3.0
5.6

6.3
12.4

5.4
6.9

Annual

1971
1972
1973
Cumulativec

1972
1973

a The trend rate of increase in output per man-hour was calculated as the com
pound annual rate of increase from 1958 through 1969, the period used by the
Price Commission for developing rates of productivity growth for use as offsets
to wage cost increases. The trend rate for the manufacturing sector was a
3.4 percent annual rate.
*> Increments to profits and prices attributed to the difference between short-term
and trend rates of change in output per man-hour are calculated by applying the
differential in output per man-hour changes to the compensation share of value
added in the manufacturing sector.
c Annual changes may not sum to cumulative totals because of rounding and
cumulative totals for components may differ in addition because they are cumu
lated on the basis of the percentage margin prevailing in 1971.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.

124

Table A -6
U.S. EXPORTS OF PORK TO MAJOR MARKETS, BY MONTHS, 1972-74
(millions of pounds)
Jan.
Canada
1972
1973
1974

.9
3.5

2.1

Feb.

March

April

May

June

July

Aug.

Sept.

Oct.

Nov.

Dec.

Total

1.1

1.8
6.3

2.7
3.2
2.2

1.8

5.2
1.0

3.4
3.2

2.0
2.0
5.4

2.1
1.9
4.0

2.7
.7
5.4

4.2
3.6

5.4
7.1
7.5

3.7
4.0
5.8

3.1
2.5
5.0

31.6
43.4
51.0

1.0
1.1
.9

1.0
1.0
.9

1.0

1.3
1.2
1.1

1.6

1.0

2.1
1.6

1.5
.8
1.5

12.8
12.9
12.3

2.3
1.9
1.1

.8
1.1
5.3

2.2
.9
4.3

9.4
4.1
5.6

.4
.6
.8

.8
.5
.2

46.3
96.8
21.5

.6
.4

.7
.3
.8

.7
.7
.9

1.0
1.2

.9
.8
.8

8.6
7.6
9.9

7.8
5.6
14.8

16.8
13.1
15.1

6.5
7.7
9.4

6.3
4.6
7.5

99.3
160.7
94.7

Caribbean
1972
1973
1974

.9
,9
.9

1.0

.9
.7

1.0

Japan
1972
1973
1974

.1
.6
.5

Others
1972
1973
1974
Totals
1972
1973
1974

1.1
1.3

1.0

1.1
.9
1.0

.2
5.1
.2

1.0
24.3

5.3
25.1

15.0
23.4

9.6
9.4
1.1

.8
.4
.5

.6
.6
.7

.3
.6

.6
.9

.7
.6
.7

.5
1.2
.9

1.2

.7
.6
.7

2.7
5.3
4.1

3.1
11.6
2.4

3.8
32.2
3.3

9.9
29.8
4.9

18.5
28.7
5.4

13.1
13.7
8.3

6.0
5.2
7.1

4.8
3.4
12.4

125

Source: U.S. Department of Agriculture, Foreign Agricultural Service.

8.6

Table A -7
U.S. EXPORTS OF LIVE CATTLE TO CANADA,
BY MONTHS, 1971-74
(number of head)

1974

1971

1972

1973

January

30,799

3,540

2,494

7,190

February

4,004

391

1,520

18,222

March

4,082

3,378

2,994

20,381

April

4,171

11,456

1,634

2,488

May

1,477

8,320

2,480

405

June

2,778

2,688

3,710

416

July

Month

1,291

1,133

4,430

145

August

257

714

17,071

128

September

157

527

39,124

7,988

379

334

64,204

11,524

November

1,165

17,358

27,306

8,203

December
Total

7,398
57,958

11,520
61,359

18,351
185,318

12,237
89,327

October

a Estimated.
Note: Cattle exports include all cattle except breeding cattle.
Source: U.S. Department of Agriculture, Foreign Agricultural Service.

126

Ta b le A -8
U.S. IMPORTS OF BEEF AND PORK FROM CANADA
(1,000 pounds)
Jan.

Feb.

Mar.

Apr.

May

June

July

Aug.

Sept.

Oct.

Nov.

4,133

3,992

4,121

4,738

6,145

6,436

5,749

5,573

4,557

4,387

4,802

3,663

58,298
56,304

Dec.

Total

Beef
1972
1973

3,381

3,436

3,384

4,185

5,643

4,445

4,578

14,072

5,649

2,746

2,235

2,550

2,889

4,215

1,912

36,910

3,818

5,094

3,260

2,096

2,638

2,347

2,643

3,114

2,884

1972

7,008

7,067

6,958

5,566

6,342

6,400

6,440

5,611

3,848

4,062

4,636

3,596

67,532

1973

4,043

4,533

5,158

6,213

6,872

7,425

6,365

9,747

5,387

3,929

4,855

3,711

68,238

1974

6,485

7,317

5,719

3,321

4,010

3,238

3,696

3,887

3,608

3,834

5,569

3,028

53,712

1974
Pork

Source: U.S. Department of Agriculture, Foreign Agricultural Service.

127

Table A -9
MEAT PRICE SPECIALS AS MEASURED BY PRICE AND
VOLUME EFFECTS, 1971-74
(cents per pound)

Year /
Month

Beef

Pork

1971

Year/
Month

Beef

Pork

1973

Jan.

6.1

6.2

Jan.

3.8

2.9

Feb.

4.1

6.2

Feb.

3.8

4.3

March

4.8

5.3

March

3.5

3.6

April

3.5

6.1

April

4.0

4.6

May

4.8

6.5

May

3.6

4.3

June

4.6

5.3

June

4.0

3.3

July

5.8

4.4

July

3.6

2.1

Aug.

5.3

4.4

Aug.

0.3

2.0

5.2

Sept.

2.3

3.3

Sept.

4.8

Oct.

5.4

4.9

Oct.

5.3

4.9

Nov.

4.1

4.4

Nov.

5.3

5.5

Dec.

2.8

3.8

Dec.

5.0

4.1

Jan.

3.6

3.2

Jan.

3.8

4.6

Feb.

3.3

Feb.

4.5

5.0

1972

1974

March

4.0

5.6

March

6.4

6.1

April

5.4

5.2

April

5.8

6.8

May

5.4

4.4

May

5.4

6.1

June

4.3

3.0

June

6.1

5.8

July

3.6

3.2

July

4.8

4.0

Aug.

4.3

2.9

Aug.

5.6

3.8

Sept.

6.1

2.9

Sept.

6.6

4.6

Oct.

5.4

3.0

Oct.

8.2

4.9

Nov.

5.6

3.8

Nov.

8.2

4.9

Dec.

4.8

3.8

Dec.

8.4

5.5

Source: U.S. Department of Agriculture, Economic Research Service, Commodity
Economics Division.

128

Table A-10
SOFTWOOD LUMBER PRODUCTION,
NET TRADE AND STOCKS, 1971-74
(billions of board feet)

Year/
Month
1971

January
February
March
April
May
June
July
August
September
October
November
December
1972

January
February
March
April
May
June
July
August
September
October
November
December
1973

January
February
March
April
May
June
July
August
September
October
November
December

Softwood
Production*1

Net
Imports5

Stocksc

29.7
2.2
2.4
2.8
2.9
2.6
2.8
2.6
2.7
2.7
2.6
2.5
2.4

6.5
.4
.4
.6
.5
.6
.7
.7
.5
.7
.4
.5
.6

4.3
4.9
4.8
4.8
4.7
4.7
4.5
4.5
4.4
4.4
4.3
4.3
4.3

31.4
2.4
2.6
2.9
2.7
2.9
2.8
2.6
2.8
2.7
2.6
2.2

8.0
.7
.6
.6
.6
.8
.6
.7
.6
.7
.7
.8
.6

3.6
4.3
4.3
4.2
4.1
3.9
3.8
3.7
3.7
3.7
3.7
3.7
3.6

31.6
2.5
2.5
2.9
2.8
2.8
2.7
2.5
2.8
2.6
2.8
2.5
2.2

7.6
.8
.6
.7
.6
.7
.7
.7
.4
1.2
.6
.5
.5

3.9
3.6
3.6
3.7
3.7
3.7
3.6
3.6
3.6
3.7
3.8
3.8
4.0

2.9

129

Table A -1 0 (continued)
SOFTWOOD LUMBER PRODUCTION,
NET TRADE AND STOCKS, 1971-74
(billions of board feet)

Year/
Month
1974

January
February
March
April
May
June
July
August
September
October
November
December

Softwood
Production3
28.0
2.3
2.4
2.7
2.9
2.7
2.4
2.3
2.4
2.2
2.2
1.7
1.5

Net
Imports*
5.6
.5
.4
.5
.5
.6
.6
.5
.4
.5
.4
.3
.3

Stocksc
4.3
4.1
4.2
4.1
4.2
4.1
4.2
4.3
4.4
4.5
4.5
4.4
4.3

a National forest products.
b Total sawmill products,
c Gross mill end.
Source: U.S. Department of Commerce, Bureau of Economic Analysis, Business
Statistics 1973 (Washington, D. C.: U.S. Government Printing Office, 1973), p. 148,
and Monthly Survey of Current Business, S-31.

130

Table A-11
CATTLE HIDE PRICES AND EXPORTS, 1971-74
Prices for Light Native Steer Hides

Exports

(cents per pound)

(millions of hides)

Month

1971

1972

1973

1974

1971

1972

1973

1974

January

15.38

20.33

45.40

37.93

1.2

1.3

1.5

1.4

February

15.84

21.49

44.55

37.94

1.3

1.2

1.8

1.5

March

15.90

25.68

40.20

32.76

1.6

1.7

1.8

1.5

April

17.00

28.85

35.85

31.68

1.2

1.1

1.3

1.6

May

16.68

30.03

36.31

30.76

1.3

1.4

1.6

1.2

1.3

1.1

June

15.86

31.07

35.49

27.84

July

15.33

32.18

36.07

26.43

2.1

1.2

1.6

1.3

1.1

1.5

August

15.47

33.65

39.89

24.10

1.2

September

15.81

36.83

35.74

25.58

1.3

1.2

1.4

1.6

1.9

1.6
1.7
1.9

October

16.04

44.65

35.48

November

17.16

46.21

35.55

December

18.38

43.63

Source: U.S. Department of Commerce.

36.25

21.29
20.47

1.7

1.5
1.4

20.00

1.7

1.5

1.4

Figure A-1
CHANGES IN PRICES AND UNIT LABOR COSTS AND DIFFERENCE
IN CHANGES FOR NONFINANCIAL CORPORATIONS, 1959-73

Note: Quarterly percentage changes from four quarters earlier.
Source: U.S. Department of Labor, Bureau of Labor Statistics.

Figure A -2
CHANGES IN PRICE AND UNIT LABOR COSTS AND DIFFERENCE
IN CHANGES FOR THE PRIVATE NONFARM SECTOR, 1950-73

Note: Quarterly percentage changes from four quarters earlier.
Source: U.S. Department of Labor, Bureau of Labor Statistics.

Figure A -3
PRICES O F M A JO R A G R IC U LTU R A L C OM M ODITIES, 1971-73
$/cwt.

$/cwt.

(1) Price of Barrows and Gilts at Omaha, 1971-73

(2)

Price of Choice Feeder Steers* at Omaha, 1971-73

* 600-700 pounds in 1972-73; 550-750 pounds in 1971.
S/cwt.

(3)

Price of Choice Slaughter Steers* at Omaha, 1971-73

* Sold out of first hands.
Source: U.S. Department of Agriculture, Livestock Division, Agricultural Market
ing Service.

134

Figure A -3

(continued)

PRICES O F M AJO R AG R IC U LTU R A L COM M ODITIES, 1971-73
$/bu.

0/lb .

(4) Price of Corn at Chicago, 1971-73

(5) Price of Broilers,* 1971-73

* Nine-city weighted average.
$/bu.

(6) Price of Soybeans at Chicago, 1971-73

Source: U.S. Department of Agriculture, Economic Research Service.

135

Full text of Controls and Inflation : The Economic Stabilization Program in Retrospect

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