of companies within the context of the overall economic environment is, for a number of reasons, a more complex and time-consuming issue than are short-term price decisions. For the Cost of Living Council, attempting to analyze and coordinate the capacity expansion efforts in different industry agreements would have been too great a task for the staff to undertake. The companies also resisted making major capital commitments, de novo, in such a short time period. Normally, large-scale investment plans are extensively studied by firms and put through a rather elaborate internal approval process. Along with the resource and data constraints, the Cost of Living Council was reluctant to engage in investment planning for the private sector. The Council, although concerned about the effects of insufficient capacity on inflation, was also cognizant of the hazards of over-investment. There was also some concern with the ability of the construction industry to respond to demands for massive new plant expansion from many industries.

The commitments to reopen recently closed plants and to keep marginally productive operations running were, practically speaking, the only capacity actions the Council could take. This was an especially important feature in the fertilizer and coal exemptions, because of the large number of marginally profitable facilities in these industries. Some staffers later reflected that these types of commitments might have been gratuitous because price increases following decontrol would have made marginally efficient plants profitable enough to be reopened. However, because of the time lags and expense involved in opening and shutting plants, it was generally believed, within the Council, that such commitments were desirable: With the knowledge and certainty that prices would rise, the probability of keeping these plants open was higher than if the uncertainties of free markets and government regulatory action had to be factored into decisions to reopen or keep open plants.

Export Commitments

Because of the price differentials on internationally traded commodities caused by a combination of domestic price controls, the effects of devaluation and expanded world demand-exports of a number of key commodities had significantly accelerated during 1973 and the early part of 1974. Since one ameliorative to inflation is an increase in supply, the Council conspicuously sought to gain commitments from firms involved in the export of these commodities as a condition of decontrol. This was especially critical in light of the fact that prices were generally being held below their equilibrium levels by concomitant price restraint commitments. Earlier in Phase IV, export

limitations on agricultural commodities were recommended by the Cost of Living Council but rejected by the Administration because of reluctance to disrupt trading relationships. (This is dealt with in somewhat more detail in the Policy Planning paper.) The Council, therefore, was mindful of the need to keep export limitation commitments from disrupting these relationships or causing firms to break contractual obligations. Following the paper exemption, which spefically allowed existing contractual arrangements to stand, certain trade interests quietly tried to force the Council to back off from the export limitation provisions of the paper exemption. A staff study showed the impact on foreign supplies to be minimal and in light of critical domestic shortages of pulp, the export limitation was left unchanged.

Tripartite Committees

The fourth important aspect of commitments was their use as an instrument of structural improvement. The Cost of Living Council believed that improvement in certain structural and institutional arrangements at the microeconomic level were critical to the success of any long-run economic stabilization effort. In a speech given soon after the expiration of mandatory controls, Dr. Dunlop outlined this different approach to moderating inflation:

"While not neglecting the contribution of other policy tools, I would like to stress the need for a whole series of structural changes in the economy and in their relations to government in order to constrain inflation over the long pull. These structural changes take time to develop; some are major institutional changes, while others are more modest adjustments. They involve seeking to get government and private groups to change their internal decision-making processes, their habits of mind and thought patterns, and their responses to their outside worlds. Such changes cannot be achieved by fiat or regulation, but must emerge from persuasion and hard experience as a series of new consensuses, both within the society and within separate economic groups and institutions." 4

To this end, the Cost of Living Council arranged the formation of committees (most of them tripartite) in the fertilizer, cement, paper, coal and retail food industries as vehicles to effect these changes. In the fertilizer case, two committees were set up, with one being an interagency government committee.

John T. Dunlop, May 6, 1974 Speech, "Towards A Less Inflationary Economy," Before the Society of American Business Writers, San Francisco. (Available in CLC Archives.)

Summary

The direct effects of commitments were to attack the symptoms and the roots of inflation in both the short and long run. Price, production and export commitments sought to limit price increases while maintaining domestic supplies in order to lessen inflation in the immediate future. To the extent possible, the longer run causes of inflation would be dealt with by commitments to increase capacity, and to improve collective bargaining and industry-government interaction.

INDIRECT EFFECTS

Public Approval

Public and Congressional reaction to the commitments tactic was favorable. The fact that fertilizer companies agreed to divert fertilizer materials from the export market and to expand available capacity placed the price increases that followed decontrol in a context of responsibility; these otherwise intolerable price increases did not precipitate overwhelming outcries inferring abdication of stabilization responsibility. Although the Council was apprehensive about public response to the auto exemption, favorable reaction to the surprising move to decontrol that industry was important in persuading the Council to proceed with decontrol as planned.

In general, commitments influenced the perceptions of exiting out of controls. Decontrol was not necessarily viewed as a retreat in the fight against inflation. Decontrol, when carried out with commitments, conveyed the notion that the government was still vitally concerned with inflation. The agreements between the Cost of Living Council and the companies ensured that inflation was still a concern and would still be affected, although without the use of mandatory controls.

Order

The use of commitments proved initially to be helpful in resolving the issue of how to order the decontrol process. This was one of the most difficult questions that arose in forming the Council's policy on decontrol. In addition to the economic necessity to address the issue of order, it was necessary to address the issue from a standpoint of equity and due process of law. From an internal management viewpoint, the limited resources and time that was available for decontrol required that some ordering of the process be developed. These needs for order were compatible, and the answer to the eco

nomic order question would serve to satisfy the legal, political and equity questions. This key answer, however, proved elusive.

What seemed at the outset to be the easiest means of ordering the process, the Black Book, could only provide general guides to the process. At that meeting a number of legal questions were raised concerning, among other things, the possibility of suits brought on the grounds that either a company's request had not been subject to due process of law, or more directly, that the Council's decontrol actions were arbitrary and capricious. The Council wished to avoid being caught up in a legal thicket, but at the same time issuance of strict criteria would hamper the economic and administrative flexibility of the Council. Furthermore, the fact that there were no set criteria might itself be construed as arbitrary rather than as a realistic reaction to the complex economic environment. Also, publication of a list of criteria-especially if it was not universally applicable -could be used by companies in besieging the Council with pressure and requests suggesting more rapid decontrol-when in fact such action would not be economically sensible, despite some mechanical matching of criteria.

An additional problem concerned the ability of a limited staff to deal with requests for exemption from all sectors of the economy. With the announcement of the Council's intention to decontrol industries selectively, it was clear that the Council would be harassed with horror stories, true or false, from many industries, detailing the consequences of their not being decontrolled immediately; unemployment, shortages, a greater volume of exports, higher long-term prices, etc. As it turnd out, calls and visits of businessmen, trade association representatives and other interest groups were a great drain on the Council's time and energy. Beyond that was the problem of separating the serious claimants from the less urgent or even false situations, given severe time and data limitations.

Initially, the requirement that major firms in an industry make commitments in exchange for decontrol provided one effective way to meet these problems. The policy of requiring commitments provided the Council with a defensible rationale for its ordering process. No two industries or firms were alike, and therefore different commitments had to be negotiated in each case. Since there was virtually no comparability between the handling of major industries, the Council could not reasonably be charged with discrimination on arbitrary grounds or acting without due process.

Commitments also provided a test of the seriousness of an industry's plight. Council staff would often respond to an industry tale of

woe with a request for responsible commitments that would help ameliorate the situation. During the first few months of the program, commitments acted as a successful screen in reducing the number of industries clamoring at the Council's door for decontrol to a manageable flow. At this early point in the process, commitments were a mystery and it is probable that many industries were leery of coming into the Council for decontrol negotiations. However, by early Spring the uncertainty had disappeared, and lawyers and businessmen converged on the Council with the decontrol deals they were willing to make. Apparently, commitments were now perceived as the key to the safe where exemptions were kept. Usually, the terms of these unsolicited agreements were not acceptable to the Council, and often represented little sacrifice on the part of the firm, but Council staff had to spend time discussing some number of these cases with the individual company representatives. These sessions were time-consuming, and delayed analysis and negotiations with companies who were willing to make more serious and restraining commitments.

By aiding in the ordering process and by providing a rationale for the order, commitments were very elemental in the successful progression of decontrol. Their effect in this role diminished as the decontrol program went on and commitments and the decontrol negotiation process became less of a mystery, although mid-level staff began to screen much of the preliminary commitments traffic.

Another drawback to commitments appeared as the manpower limitations surfaced. A backlog of exemptions built up, where decontrol had been approved-pending commitments—and negotiations had not yet been finalized. Only a few senior staff members handled these sensitive and difficult negotiations; thus a bottleneck was created at this point in the decontrol process. Discussions with members of Conlan's Economic Policy staff suggested that more commitments would have been negotiated had there been enough negotiators and had they had enough time. The delays did not prove serious in an economic sense, although they point out one of the difficulties of the decontrolwith-commitments route-negotiations take time and patience.

Decontrol Negotiation Tactics

The experiences of the few staff people who handled the commitments negotiations for the Cost of Living Council provide an interesting insight into this important aspect of the decontrol effort. The actions being taken were unprecedented, and extra-legal with respect to the Economic Stabilization Act. Antitrust considerations required the Council to negotiate separately and in secret with each company.