accurate determination of when an industry had actually violated its commitments. Although a monitoring group was established in the Council's Office of Operations, and a bi-weekly report was assembled, problems of obtaining accurate information prevented it from being a totally effective compliance check. The Council had not sought to have companies commit to providing commitment-monitoring data in order to ease the administrative burden of controls. Commitments might have become more complicated and negotiations more difficult if such reporting commitments were sought. Of the different types of commitments, only price commitments will be discussed here because of the difficulty in assessing the extent to which decontrol actually affected the investment and production plans of industries (see paper on Investment). There was evidence, however, that fertilizer and zinc exports had been curtailed as a result of commitments. In the course of preparing decontrol studies, negotiating price commitments, and in monitoring commitments, the Council staff was greatly hindered by the paucity of accurate information, particularly that which was publicly available at the "industry level." The data problem with respect to commitment monitoring was complicated by the fact that the Council lost all formal investigative power on April 30, upon expiration of the Economic Stabilization Act. As a result of this lack of information, solid evidence on compliance with price commitments existed for only four industries: cement, paper, aluminum and autos. In seven other industries, less conclusive evidence came from wholesale price index components which are generally less conclusive than individual firm data because: 1. Sample size was often inadequate at the individual commodity level to provide a sufficiently accurate picture of price movements. 2. Committing firms often made up only a portion of the sample, and non-committing firms could conceivably bias the sample. 3. Often, the items covered in the commitments were not even part of the sample, as in semiconductors and radial tires. Often the sample did not cover the whole product line and therefore, when weighted average price increase (WAPI) commitments were made, the most closely parallel index series might indicate violation but the firm's actual WAPI might be in compliance. 4. There are other problems with reporting of these prices, e.g., lags and reporting of quoted prices as opposed to prices actually charged. Much qualitative and quantitative information was also gathered and evaluated through the Internal Revenue Service Industry Monitors, who relied primarily upon personal contacts developed through earlier enforcement activities with the committing firms. Although it was the only direct source of company data, such contacts could have had a tendency to bias reporting of price actions with respect to commitments. Conclusive Evidence The following discussion attempts to draw some tentative conclusions about compliance with commitments. Apart from the considerable data problems, described briefly above, assessment of such matters is particularly difficult so soon after the fact. Similarly, tentative conclusions that price commitments had some affect on limiting or spreading out price increases may prove to be erroneous as more and better data become available or as economic events take their eventual course. For three industries-cement, paper and aluminum-reasonably reliable price data indicates that price commitments were honored. In the cement industry, prices were virtually unchanged through January 1, 1974 and increases were moderate thereafter. Prices in the paper industry, starting somewhat lower than commitment levels, appear to have moved upward to their committed levels and held there until after their commitment had expired. Aluminum followed the agreed-upon pattern for price increases (holding until July 1 to 31.5/lb. and thereafter changing the price to 33.5¢/lb). The auto industry was the only major industry where clear evidence indicates that price commitments were violated. A maximum increase of $100 or $150 weighted over all makes of automobiles was agreed to by three of the four manufacturers (Chrysler being the exception). Immediately following the expiration of the Act on April 30, General Motors, Ford and American Motors increased their 1974 model prices despite their commitment of no further increase during the 1974 model year. These increases were made by the companies, invoking the escape clause ("barring unforeseen major economic events") to rationalize the increases on the basis of cost increases in excess of those projected at the time of the exemption. Less Conclusive Evidence The seven industries where the WPI and IRS monitor reports indicated general compliance with the price commitments were: Semiconductors Fertilizer Leather Shoes and Products Furniture Mobile Homes Fabricated Rubber Products From the WPI evidence, the tire industry appears not to have fulfilled its commitment. Although the industry monitor indicated that tire manufacturers were staying within their 5 percent WAPI, the most closely corresponding WPI component rose by almost 5 percent in July, one month before the commitment expired. Tire firms that made commitments did not have enough authorized and unused price increases at the exemption date to explain this 5 percent increase. Sampling problems, however, may explain this seeming violation. Finally, there were two industries, coal and canned fruits and vegetables, where the publicly available evidence bears little relationship to the kind of commitment made. Therefore, any determination of fulfillment is virtually impossible without extensive individual company data. In both cases the IRS monitor's investigation indicated that the commitments had been fulfilled as of the last monitoring report in June. In summary, of the 14 industries in which firms made price commitments, only two appear to have violated their commitments. One of these, the auto industry, began increasing prices immediately following the expiration of Program authority on April 30, while the second, rubber tires and tubes, held until one month before their commitment ended. COMMITMENTS' IMPACT ON The effect of commitments on limiting pass through of cost pressures in the remaining industries was evident in seven cases, because immediately following the expiration of these seven commitments, prices rose dramatically in each area. (Of the remaining industries where price commitments were made, data on price movements for five were either unavailable or inadequate to determine post-commitment movements.) By dampening immediate price pressures, potential downstream cost pressures were reduced, and by spreading the price bulge that characteristically followed most wage and price control programs, commitments helped engineer the relatively undisruptive exit from controls. Observations Sector-by-sector decontrol was chosen as the Phase IV tool to remove controls from the economy partly because of its appeal to the Cost of Living Council staff as a sensible way to approach the problem, and partly because the method represented by the change to Phase III had been discredited. Given the unusually strong price and cost pressures at all levels of the economy, simple removal of controls in one act was not a viable method. In addition to its economic advantages, decontrol with commitments was perceived by the Council to be a way of maintaining public support for an exit from controls while avoiding any appearance of abdication of responsibility. The stringency of Phase IV controls eroded consumer, business and labor support for the Program, since prices and costs continued to rise despite the presence of controls. The rise in food prices particularly eroded consumer support for the Program (see public opinion appendix to Public Communications paper). The gasoline shortage also led some consumers to realize that they were less opposed to price increases than they were to shortages. In terms of the task laid out by the Administration-to remove controls in an orderly fashion-decontrol was a success: too much of one, perhaps, as the lack of public and Congressional support for any type of controls led to the defeat of the Administration's proposal for maintenance of an anti-inflation agency. However, it is not clear to what extent the policy of sector-by-sector decontrol contributed to the lack of opposition to the termination of controls, given the other factors operating on public and Congressional opinion at that time. Although sector-by-sector decontrol was a success compared to the Phase III approach, it was not necessarily the superior strategy. The crucial variable was the economic environment facing the (de)controllers. Phase III might have been considered a success had the originally envisioned series of economic events materialized. Perhaps the critical event was the acceleration of food price increases in the last quarter of 1972 and the first half of 1973. A few general observations about the applicability of each method to different economic conditions should be made: 1) when there is a likelihood of substantial price increases following decontrol, it is probably more feasible to use the sector-by-sector method, because it tends to spread those increases out, delaying both the political and economic impact of those increases; and 2) if public and Congressional opinion are largely in favor of controls, then it is probably better to use sector-by-sector decontrol, again because it spreads out the impact, and commitments can be utilized to retain some of the desirable features of controls. However, having done it once, would it work again? The answer is by no means clear. It must be noted that sector-by-sector decontrol is a difficult, time-consuming and often arbitrary process. To be successful, this decontrol policy requires competent leadership, good judgment, analysis, negotiation, creativity and luck. Another feature of sector-by-sector decontrol is the double-edged opportunity it affords for government involvement in the private sector's decision-making process. This power can be effective in facilitating needed changes where the market-or previous government action-has failed to provide a solution, but it requires prudent handling. The commitments process was delicately handled in Phase IV, and part of its success came from its emphasis on persuasion and accommodation rather than on coercion and fiat. The importance of decontrol to the overall performance of a controls program has often been ignored by planners of controls programs and by economists in general. The experiences of Phase III and Phase IV, although distinctly colored by the peculiar economic conditions of 1973 and 1974, can provide valuable insights for future administrators of temporary stabilization programs. Removing mandatory wage and price controls from the economy is an extremely complicated task that requires a delicate balance of political and economic factors, some of which lie beyond the power of government to influence. |