or decontrolled) status of the economy, this study was to come up with a creative method of decontrol for the remaining sectors that would be regulatorily implementable as well as economically sound. APRIL FOOLS DAY: THE "COOKIE CUTTER"

The Council determined that an explicit announcement of sectors under controls would facilitate negotiations for commitments with the major firms in those industries retained under controls. It was thought that emphasis on these industries, in conjunction with the Council's legislative strategy would create conditions conducive to productive commitments between the Council and individual firms in these remaining industries.

On February 6, 1974, John T. Dunlop had recommended to the Senate Subcommittee on Production and Stabilization that the Council's sector-by-sector decontrol efforts be allowed to continue through April 30, 1974. He also recommended that the Economic Stabilization · Act be extended to authorize continued mandatory wage and price controls in the health care sector and perhaps a few other sectors of the economy (later defined to include construction) where conditions warranted and where wage and price controls could make a significant positive contribution to economic stability for a period beyond April 30, 1974.

Since "other sectors" were never explicitly named, the possibility still existed of controls extending beyond April 30, 1974 for industries not decontrolled prior to that time. Apart from the need to engage in more thorough analysis it was envisioned, in January and February, that this would serve as a useful bargaining chip that might heighten interest in negotiating decontrol agreements. Without some possibility of continuing mandatory controls it would become more and more I difficult to negotiate commitments that would serve to spread the bulge or otherwise dampen inflation after the lifting of mandatory controls.

After the "cookie cutter" study was completed, the Council's intent was to announce a general decontrol action, with the express exception of certain industries, on April 1. Those industries consisted of two groups: industries with problems that might be amenable to commitments or where sufficient analysis had not yet been performed, and industries that had always been considered as "last men out" because of the critical inflationary problems they posed. The former E group would be exempted with or without commitments before April 30 in a second general decontrol action.

Any impact this strategy might have had on encouraging commitments faded on March 26, 1974, when the Senate Banking Com

mittee tabled the Administration proposal for a partial extension of controls and a monitoring agency.

The "cookie cutter" action was still seen as necessary from the standpoint of orderly deregulation of the economy. It was issued after a painstaking and frantic effort by CLC economists and attorneys to ensure that all aspects of this sweeping regulation change were accurate and precise. A regulation press release and fact sheet were issued that specifically defined who was "in" and who was "out."

A wide variety of industries were exempted by the April 1 action. The "industries" varied in scope from all apparel (SIC 23) to a category as narrow as buttons (SIC 3963). In most cases the exemption applied to both prices and wages, but in a number of cases either one or the other was retained under controls. Although a great number of "industries" was involved, coverage of the economy was not substantially reduced by this action. Coverage of the CPI declined from 27.4 to 24.2 percent (the retail trade exemption had already reduced coverage significantly); WPI coverage fell from 42.1 to 37.4 percent, and labor force coverage was reduced from 32.3 to 26.8 percent. The action did however serve to remove controls from a large number of areas where continued controls would clearly be unproductive. It was also intended to clear up any uncertainties with respect to boundaries of controls coverage.

THE SECOND "COOKIE CUTTER"

On April 18, the Council issued the second planned "cookie cutter" regulation to exempt those industries for which further analysis indicated that decontrol would pose no economic problems. Commitments, by this time, were not an option.

Included in this group were textile, glass, metal cans, soaps, detergents, cleaning products and cosmetics. The industries that the Council expressly kept under controls were primarily those related to construction, steel, copper, food processing, health, automobile parts and retail auto sales. Wage controls were generally retained on these industries, and were also retained on all public employees.

April 30: The End of Controls

The Congress' refusal to approve a partial extension of the Act and the work on the "Cookie Cutter" project slowed the volume of decontrol activity considerably in April. There were four decontrol actions in April: April 1-general decontrol; April 15-retail and wholesale food; April 18-second general decontrol; and April 30— expiration of controls authority, when all remaining controls expired.

When it became obvious that continuing stabilization authority under the Economic Stabilization Act would expire, leaving no provision for monitoring and enforcing decontrol commitments, the Director of the Cost of Living Council, John T. Dunlop, sent a telegram on May 1, 1974, to all firms which made commitments to the Council, reiterating the Council's expectation that all commitments would be honored, despite the expiration of the Economic Stabilization Act.

Using rough measures, by April 30, 1974, the date of expiration of continuing authority under the Economic Stabilization Act, the Council had exempted all but 12.2 percent of the CPI, 31.5 percent of the WPI, and 24.1 percent of the labor force. At the beginning of Phase IV, mandatory controls covered 42.6 percent of the CPI, 69.4 percent of the WPI, and 44.1 percent of the labor force.

The health services, and gasoline and motor oil components of the CPI, which the Administration expected to keep under mandatory control beyond April 30, were responsible for 9.2 percentage points of the 12.2 percent coverage of the CPI at the end of the Program.

In the WPI, the sector-by-sector decontrol process had brought the Program's coverage down from 69.4 percent at the beginning to 31.5 percent on April 30, 1974. The major items in the WPI remaining under control at the end of the Program were petroleum (under FEA's jurisdiction), processed foods and feeds at the manufacturing level, most steel products, copper, approximately one-half of the machinery and equipment industries, household appliances, tobacco, and profit controls on parts of the chemicals and plastics industries.

On the wage side, the sector-by-sector decontrol process had reduced Phase IV coverage of the labor force from 44.1 percent at the beginning of the Program to 24.1 percent by April 30, 1974. At the end of the Program, most construction and state and local government employees, and employees in the transportation and public utilities sectors, and small portions of employees in the manufacturing and mining, services, and trade sectors were still under controls.

The gradual reduction in the Program's coverage of the major items in the CPI, WPI, and labor force softened the impact of the ultimate decontrol that occurred on April 30, 1974. The gradual decontrol process appeared to have successfully decompressed some of the cost pressures that were bottled up in many industries by spreading the release of these pressures over a long period of time so that, on May 1, 1974, there were immediate post-controls catch-up price and wage increases in only a few segments of the economy. The price and supply commitments agreed to by major firms in 18 industries

(See Appendix IV) formed the final part of the strategy of spreading the bulge and avoiding a headlong reentry into controls.

Decontrol Commitments

The tactic of obtaining voluntary commitments from individual companies in exchange for decontrol originated with John Dunlop's negotiations with the fertilizer industry. In the exemptions following that first one, the commitments process was refined to reflect the lessons learned from previous commitment negotiation experiences.

DIRECT EFFECTS

The two most common types of commitments (because of their direct impact on inflation) were related to price limitation and supply expansion. Initially it was Dunlop's intention to seek specific capacity commitments in order to effect long-term price stability rather than to go after detailed, formal price limitation agreements. Reflecting this policy, two of the first three exemptions-fertilizer and zinccontained specific, oral agreements from the companies on plant reopenings, keeping marginally productive plants open and new capacity expansion. The Council also reached informal understandings on the extent of price increases following decontrol. The experiences gained from these exemptions and their respective aftermaths were partly responsible for a change of emphasis from supply commitments to price commitments. The Council later learned to put these commitments into writing.

Price

Of the eighteen industries in which commitments were made, some form of formal price restraint agreement was reached in all but fertilizer and zinc. Fertilizer price limits were negotiated by Dr. Dunlop in January following unexpectedly rapid price increases that came after the October 25 exemption.

The intended direct effect of price limitation agreements was to spread the price bulge that was being contained by controls over several months, both during the life of and after the expiration of controls. These built-up price pressures were released slowly over a long period of time, hence it was less likely that an inflationary spiral would develop as decontrol progressed. Companies making decontrol agreements were given some price relief at the time of decontrol, which had the benefit of providing relief to the market, while releasing price pressures in a two step process; the time span on commit

ments then served to defer further increases until after the expiration of controls.

The specificity of price limitation commitments varied from exemption to exemption. In the prepared feeds exemption, for example, all that was required was that the American Feed Manufacturing Association report, on a quarterly basis, the prices charged on major products. In the January 30 petrochemical action, the Council and the industry estimated that the direct impact of price increases for basic petrochemicals by refiners would be limited to the range of $270-$325 million. In most of the remaining price increase commitments, restraints were placed on the weighted average price increase that a company would make on certain products or product lines over the agreed upon time period. For example, rubber tire manufacturers pledged to limit the weighted average price increase for passenger car tires to 5 percent at the wholesale level through August 1, 1974. This type of agreement was similar to the WAPI or TLP concepts utilized in Phase II as one means of controlling prices. (See Price Control Mechanisms paper.) In the paper and aluminum exemptions, the Council and the companies agreed on specific price increases or ceiling limits on certain individual products. This was an especially complicated task in the paper industry, with its wide variety of products.

Starting with the auto exemption, the price limiting agreements contained an escape clause for the companies, i.e., the provisions that the companies would not violate their commitment unless forced to by "unforeseen major economic events." In the automobile case, the Council described such events as "a major foreign currency disruption, or cost increases substantially beyond those presently projected for the balance of the model year."

Supply

Supply expansion commitments were a critical part of several decontrol agreements because it was the lack of sufficient capacity that was producing inflation in many industries. The capacity agreements were generally more vague than the price commitments, although in the initial exemptions, such as fertilizer, the agreements were quite specific as to which marginal operations would be kept open and what new capacity would be added.

The Council's experiences in negotiating major exemptions had taught it that supply commitments would be difficult to obtain. One reason for this change in the inclusion of supply commitments was because of the realization that determination of the investment needs