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Wednesday > AUGUST 30, 1978
10:15 A.M. CDT (11:15 A.M. EDT)

Introductory remarks by
Henry C. Wallich
Member, Board of Governors of the Federal Reserve System
at the
Meeting of the Allied Social Science Associations
Session on
"Providing Wage Incentives and Price Stability"
Chicago, Illinois
Wednesday, August 30, 1978

Introductory remarks by
Henry C. Wallich
Member, Board of Governors of the Federal Reserve System
at the
Meeting of the Allied Social Science Associations
Session on
"Providing Wage Incentives and Price Stability"
Chicago, Illinois
Wednesday, August 30, 1978

TIP (Tax-based Incomes Policy) has made progress.
it started out as a theoretical proposition.
a bill.

Some years ago

Today it is being drafted into

In the interim, it has received intensive exploration by theorists

and tax technicians.

The present session is another

round in this

The career of TIP is an example of how an idea can move out

of the universities and research institutes into the public arena.
TIP has not yet jelled into a single model.

This is reflected

in the legislation now being drafted in Senator Proxmire *s Senate
Committee on Banking, Housing and Urban Affairs.

As that project now

stands, it is an all-purpose TIP, capable of being adapted to any
particular version, or combination.
carrot and a stick approach.
limited coverage of firms.

The legislation embodies both a

It can be applied with broad or with
It could be temporary or designed to be

It could be adapted also to a voluntary approach.


TIP has moved into the foreground because inflation has
shown itself more resistant than expected to alternative means of
combatting it.

Inflation has clearly accelerated, from the 6 per cent

area into the 8 per cent area, and threatens to accelerate further next

Fiscal and monetary policy have not succeeded in decelerating it.
I would nevertheless reject the view sometimes heard that

TIP is the only game in town.

TIP, if adopted, would have to be supported

by adequately restraining fiscal and monetary policies.

Its enactment

could not be viewed as providing a carte blanche for expansionary
At present, there are public discussions of guidelines for
wages and prices.

TIP could be viewed as a form of guideline, but a

guideline with teeth in it.

It could thus help overcome the weakness

that beset the Wage and Price Guideposts of the 1960s which lost their
credibility once they had been breached in a single major case.


wage guideline could be breached frequently, and should be breached
whenever employer and employees had good reason for settling above it.
But TIP would impose a penalty, in the form of a higher tax or, under
a carrot approach, through loss of the bonus for restraint.

Thus TIP

would exert steady pressure against inflation.
TIP so far does not have a great deal of political support,
although the legislation being drafted seems to have aroused some interest
in the Congress.

TIP distinctly lacks popularity with business and

But it shares this unpopularity with other potential candidates

-3for forceful action against inflation —

such as wage and price

controls, very high interest rates, and drastic cuts in government
TIP is tough, but we have run out of pleasant options.
inflation run is really no long-run option at all.

To let

The same or even

more drastic remedies would confront us at higher levels of inflation,
plus possibly a severe recession.

I hope it will not take such higher

levels to convince people of the need for action.

Resistance to TIP

could probably be reduced, moreover, if a version limited to large
firms were chosen.

This would also reduce its administrative complexity.

TIP has received criticism on theoretical as well as
administrative grounds.

This is highly desirable.

No novel scheme

should be proposed for implementation without thorough discussion and

As I read the present state of the discussion, TIP presents

problems but is fundamentally sound and doable.

Obviously it is no

panacea, and its effectiveness will depend on the strength with which
it is implemented, i.e., on the magnitude of rewards or penalties for
maeting or exceeding the guideline.
I would like to say a word against the charge some­
times made that TIP is onesidedly directed against labor, and that it
might exert wage restraint without exerting price restraint.

In that

case, profits would rise and labor would bear a burden from disinflation
when in fact there should be no burden on either labor or capital.


The theoretical and empirical arguments against such an
outcome are well known and I shall not repeat them.

But there is no

need to rely on them because in any event an outcome adverse to labor
can be guarded against.

This can be done by means of an increase in

the corporate income tax that would be designed to keep the after-tax
share of profits in the GNF at some benchmark level.

Such a tax

increase would be an "excess profits tax" on the profits of the entire
corporate sector instead of those of individual firms.

If the need

for it were to arise at all, the rise in the corporate tax rate would
probably be slight, with minimal negative disincentive and allocational

The bill being drafted in the Senate Banking Committee

provides for such a tax adjustment.