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January 19,1973
A look at the shape of the future
under Phase III is now in order, and
the best place to begin is with
Guidelines, a 1966 conference
report edited by Chicago Professor
George P. Shultz and containing
a major contribution by Harvard
Professor John T. Dunlop. Now that
these erstwhile professors occupy
the positions of Secretary of the
Treasury and Director of the Cost of
Living Council, respectively, their
earlier views on the matter may
provide some hints regarding the
future of wage and price controls
in an expanding economy.
Dunlop summed up his thoughts
at the 1966 conference in this way:
"A wage-price policy— between
preachment and controls— at high
levels of utilization comes down to
detailed micro-problems. . . .
A wage-price policy for high
employment involves the develop
ment of programs to break through
bottlenecks rather than to roll back
wage and price changes that may
appear to have exceeded a
generalized macro-yardstick."
Emphasis on micro
This emphasis on micro-problems
appears to be the hallmark of the
new Phase III program. The
Administration has replaced the
Phase II program with one which
is self-administered and based on
voluntary compliance, except in
certain micro areas— food, health,
construction, and interest and
dividends. Admittedly, the old
wage and price standards are
maintained relatively intact (with
some liberalization of profit-margin
regulations), and certain reporting
requirements must still be met for
major wage and price decisions,
while in addition, the Cost of
Living Council retains the power to
establish mandatory standards for
those who flout the voluntary ones.
But in general, Phase III involves
a definite trend away from reliance
on "generalized macro-yardsticks."
Dunlop enhanced his reputation
as a forecaster when he argued,
at the 1966 conference, that the
most critical sectors for future wage
and price stability would include
some branches of transportation,
medical and hospital services,
construction, local government
services, and certain professional
services. ("Most of these trouble
spots are not the concentrated
sectors which are the focal concern
of the guideposts.") While con
sumer prices generally have
increased 27 percent over the
past half-decade, certain areas
highlighted by Dunlop have
increased considerably faster—
public transportation, 44 percent;
medical care, 40 percent, and
so on down the list.
Bottlenecks— plus preachment
To overcome these problems,
Dunlop recommended that public
and private policymakers concen
trate their efforts on expanding
supplies (and constricting demands)
in the limited number of bottleneck
areas which are likely to cause the
greatest pressures on wage rates
and prices. In particular, govern(continued page 2)
C-------3
O
merit policy-makers, "aside from
continuing general preachment,"
should concentrate on overcoming
bottlenecks and should stop
attempting to compel changes in
wage-price decisions by admin
istrative pressures.
In commenting on Dunlop's
proposal, Shultz (with co-editor
Robert Aliber) pointed out that the
emphasis in this approach is on
basic economic forces rather than
exhortation or persuasion. The
Federal Government would have
a role, however, using its market
and program powers to maintain
reasonable stability of wages and
prices— for example, by under
taking training and mobility
programs to build up the supply
of labor in areas and occupations
where shortages are acute and
wages are being bid up at a rapid
rate, or by altering the timing of
Government contracts to relieve
excessive demand pressures, or
by changing Government buying
plans (including stockpile policy)
where necessary to support price
stability.
To be sure, 1973 is not 1966,
and the specific measures proposedin an atmosphere of mild guidepoststyle controls may appear ineffective
or irrelevant in an era in which
http://fraser.stloUrsfed.org/
Federal Reserve Bank of St. Louis
mandatory controls have come to
seem familiar and even desirable.
However, policymakers are betting
that the bottleneck-oriented
approach is as relevant today as
when it was first proposed, and
the success or failure of Phase III
depends upon the correctness of
their prescription.
Crucial bottlenecks
Dunlop enters his new position
after several years' success in
applying his favorite approach to
a crucial bottleneck sector, the
construction industry. During the
two years in which he has served
as chairman of the Construction
Industry Stabilization Committee,
outsized wage settlements in that
industry have been sharply
reduced, with average increases
in hourly earnings declining from
9.6 to 5.5 percent annually.
(In 1970, before that committee
got underway, first-year wage
settlements in construction
averaged 17.6 percent.) But as
he tries to deal with other bottle
neck areas such as medical care
and (especially) food, he will
encounter a number of new and
perhaps even more troublesome
problems.
Largely because of the price
upsurge in farm products and
processed foods and feeds— up at
a 14.7-percent annual rate during
Phase II, as against a 6.5 percent
rate in pre-freeze 1971— the
wholesale price index rose faster
in 1972 than in any other year of
the past two decades. Some of
this price pressure has already been
felt in the supermarkets; consumer
food prices rose at a 5.4-percent
annual rate during Phase II, as
against a 5.0-percent rate of
increase in pre-freeze 1971. But
further problems are in store,
especially as current severe
shortages of feed grains are trans
lated into higher retail meat prices.
The Administration has rejected
the proposal for direct price controls
on raw farm products as unwork
able, but instead, under Phase III
planning, has adopted a bottleneckoriented approach. In particular,
it is stressing moves to boost food
supplies, including relaxation of
farm-production restraints. Last
week, for example, it ordered the
rapid disposal of most of the
remaining grain stocks held by the
Commodity Credit Corporation, the
diversion of additional grain
supplies to the market through the
termination of previous govern
ment loans on grain crops, and
the use of 15 million acres
originally "set aside" for
conservation purposes for yearround cattle grazing. However,
considerable time may elapse
before these and similar measures
have any perceptible effect on
supply bottlenecks.
Fighting cost-push
Phase III policymakers will be
forced to deal not only with such
micro-problems but also with the
possible reassertion of cost-push
forces in a strongly expansionary
atmosphere. The economy in 1973
will be running the gauntlet of
critical wage bargaining in a
number of major industries where
resurgent profits offer an inviting
target to powerful unions.
Moreover, as the broad-based
business expansion begins to
mature, the large productivity
gains now cushioning the economy
against cost pressures could begin
to disappear. In this situation,
voluntary Phase III controls on
wage and price decisions could
be severely tested.
But perhaps the major feature of
Administration planning is the
fashioning of different types of
income policies for different phases
of the business cycle. Again to
quote Dunlop's 1966 presentation,
"A policy appropriate to an
economy starting from excess
capacity and high unemployment
is not likely to be ideally suited to
sustained high-level employment.
We do not expect fiscal or
international economic policies to
be invariant, and there is no reason
to expect wage and price policies
— and their administration— to
be more permanent." So as we
move along the business cycle,
Phase III may be replaced by a
completely different Phase IV.
But as of now, bottlenecks are
the things to watch.
William Burke
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BANKING DATA— TWELFTH FEDERAL RESERVE DISTRICT
(D ollar amounts in m illions)
Selected Assets and Liabilities
Large Com m ercial Banks
Loans adjusted and investments
Loans adjusted— total
Com m ercial and industrial
Real estate
Consum er instalment
U.S. Governm ent securities
Other securities
Deposits (less cash items)— total
Demand deposits adjusted
U.S. Governm ent deposits
Time deposits— total
Savings
Other time I.P.C.
State and political subdivisions
(Large negotiable CD 's)
Am ount
O utstanding
1/3/73p
69,337
50,679
17,854
15,061
7,688
7,256
11,402
68,555
21,905
1,179
43,899
18,294
16,907
6,372
6,813
Change
from
12/27/72
555
718
62
+
49
+
37
+
42
+
+ 121
+ 1 ,1 3 7
+ 664
+ 209
62
+
68
+
—
143
+ 114
154
—
—
—
Change from
year ago
D o llar
Percent
+ 7 ,0 0 2
+ 7 ,1 3 4
+ 1 ,7 4 6
+ 2 ,3 7 9
+ 1 ,2 2 7
+
22
— 154
+ 7 ,4 4 6
+ 2 ,1 3 2
+ 453
+ 4 ,3 5 5
+ 784
+ 2 ,5 2 3
+ 402
+ 1 ,5 8 9
+ 1 1 .2 3
+ 1 6 .3 8
+ 1 0 .8 4
+ 1 8 .7 6
+ 1 8 .9 9
+ 0.30
— 1.33
+ 1 2 .1 8
+ 1 0 .7 8
+ 6 2 .4 0
+ 1 1 .0 1
+ 4.48
+ 1 7 .5 4
+ 6.73
+ 3 0 .4 2
W eekly Averages of D aily Figures
W eek ended
W eek ended
Com parable
1/3/73
12/27/72
year-ago period
Member Bank Reserve Position
Excess reserves
Borrowings
Net free ( + ) / Net borrowed (— )
Federal Funds— Seven Large Banks
Interbank Federal funds transactions
Net purchases ( + ) / Net sales (— )
Transactions: U.S. securities dealers
Net loans ( + ) / Net borrow ings (— )
105
129
— 24
— 30
108
— 138
+
+179
+936
+ 1 ,3 9 7
+ 225
+544
+ 1 ,0 3 0
33
0
33
p— prelim inary
Inform ation on this and other publications can be obtained by callin g or w riting the
Adm inistrative Services Departm ent. Federal Reserve Bank of San Francisco, P.O . Box 7702,
San Francisco, California 94120. Phone (415) 397-1137.
Digitized for F R A S E R
@FedFRASER