SELECTIVE DECONTROL Synopsis A policy of sector-by-sector exemption eventually led the economy out of controls without either a collapse of the existing controls system or reentry into the morass of controls. By exempting industries, one-by-one, over several months, the Cost of Living Council attempted to release the price pressures that had been trapped in the economy by the second freeze and price and supply pressures that had build up during Phase IV. A crucial aspect of the sectoral decontrol process was the tactic of obtaining voluntary commitments, mainly on price limitation and supply expansion, from major companies in exchange for decontrol. This not only helped spread the price bulge, but also helped secure public support of the decontrol process. Many economists and businessmen advised John Dunlop, Director of the Cost of Living Council, that selective decontrol would degenerate into a rout as price pressures imposed non-economic judgments on the controllers. It was feared that this would result in the imposition of Phase V, an even more stringent set of controls. Few alternatives, however, were offered to the sectoral approach to decontrol. Another possibility for removing controls was the Phase III type of decontrol, which had recently been discredited in the public's mind; this might have been successful in other economic and political circumstances. As one Cost of Living Council economist said, "a viable policy option is one that recently has not been discredited," thus, despite all the uncertainties that surrounded implementation of such a plan, selective decontrol became a viable option. Introduction For the most part, the following discussion chronologically follows the development of the decontrol policy. In doing so, a number of exemption decisions are examined in detail where they are particularly relevant to policy development. Others are mentioned in passing and some are not dealt with at all. Discussions of these actions can be found in the press releases and Quarterly Reports of the Eco nomic Stabilization Program dealing with the period between October, 1973 and May, 1974. Later sections of the paper deal with specific aspects of decontrol policy (such as decontrol commitments and negotiation of commitments). There are also a number of appendices, referred to in the text, each of which deal with a particular aspect of decontrol. The reader is referred to the files of the Office of Economic Policy in the archives of the Cost of Living Council or Economic Stabilization Program for additional background or details on specific industry actions or the general policy of decontrol. Policy Backdrop: Early Considerations of Decontrol In his announcement of the Phase II program, President Nixon stated: "We will continue price and wage restraints until inflationary pressures are brought under control, but we will not make controls a permanent feature of American life. When they are no longer needed we will get rid of them." 1 Decontrol proved to be easier said than done. Although controls were considered a temporary measure, the formulation of a decontrol policy did not begin until the Phase III planning effort, in the last six months of 1972. The exemption of raw agricultural products from the Freeze and the exemptions subsequently granted in Phase II were not part of an effort to return to a free market. Rather, the exemptions that were granted during Phases I and II primarily served the purpose of streamlining the Program's controls. During most of Phase II, decontrol was rarely discussed at policy-making levels. When it was, discussion focused on concern for reducing the Program's workload or for eliminating controls from sectors where regulation was difficult (See paper on Price Control Mechanisms). Marvin Kosters, then the Cost of Living Council's Assistant Director for Economic Planning and Analysis, stated late in 1971 that if the Council was interested in reducing Phase II coverage as a means to reduce the workload, some overall decontrol policy should be formulated: "I don't know yet how we should proceed on overall decontrol of the ESP, but I have serious reservations about proceeding on a case by case basis, giving undue attention to isolated exemption requests and thereby carving out relatively small discrete segments of the economy. Some more orderly and systematic approach is essential." 2 However, as Phase II progressed, it became clear that the Council would not be inundated by exemption requests and Kosters' interest in development of an overall decontrol plan waned as other matters became more pressing. The Council was occupied, throughout 1972, with the administration of Phase II controls. Overall decontrol was occasionally discussed at lower staff levels, but it received no encouragement from the senior 1 Richard M. Nixon, September 9, 1971 Speech before a joint session of Congress. (Available in Economic Stabilization Program Quarterly Report (August 15-December 31, 1971) Appendix, Exhibit 10, p. 127.) 2 Memo from Marvin Koster to Earl Rhode. (December, 1971; CLC Archives.) |