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Exemptions Subject to Commitments as of March 30, 1974

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Exemptions Subject to Commitments as of March 30, 1974

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Exemptions Subject to Commitments as of March 30, 1974

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APPENDIX V
Examination of Selected Industries: “Last Men Out"

The industries described herein are primarily those which were assumed to be the last to be released from mandatory controls during the Phase IV deliberations on decontrol. This appendix describes other Council actions which dealt with specific problems arising in those industries as well as some general discussion of the impact of controls upon those and related industries.

LAST MEN OUT

by
Mark Kramer

With a number of industries not yet exempted by the selective decontrol process, controls lapsed on April 30, 1974. Several of these—health, construction, food industries, and steel-because of their general importance to the price stabilization program merit some discussion.

Health

Health was considered one of the most inflationary sectors of the economy, hence it was never a serious candidate for decontrol. Since 1950, the medical component of the CPI had been rising more rapidly than consumer prices in general. In the latter half of the 1960's, a marked acceleration in hospital costs occurred: hospital cost indicators rose at rates two and three times as high as the CPI in general. 1972, however, witnessed a decline in the Medical Care CPI rate of change to a point roughly equivalent to the CPI for all items. To what extent this trend was a result of economic control was uncertain; limited evidence seemed to indicate that the trend began in early 1971 before the first price freeze. But there was fear that if controls were lifted, the 8 to 9 percent rate of increase for hospital costs being allowed under controls for example, might return to the 12 to 15 percent level of the late 1960's.

A number of factors seem to explain the health industry's inflationary tendencies. First, economists have established a link between increases in insurance and increases in hospital costs. As of fiscal 1972, 92 percent of all hospital expenditures were paid by third parties, compared to 83 percent in 1965. Second, goods and services paid for primarily by third parties are generally decided upon by the seller, i.e., the doctor, rather than by the customer, i.e., the patient. The concept of health insurance removes the economic structures of price, supply and demand from medical decision-making. Little incentive is built into such a system to keep costs down or to discourage overuse. Third, due in part to the fact that hospitals are primarily managed by doctors rather than by trained administrators, hospital and health service administration has traditionally been inefficient: forward budgeting and cost management has been lacking.

Thus, due to the general absence of market forces in the health industry, controls were considered appropriate. The Council especially hoped to keep health under mandatory controls after April 30. A new National Health Insurance plan was expected to be passed by Congress that would include a price and wage stabilization mechanism for the industry. Dunlop attempted (unsuccessfully) to obtain authority to maintain controls until such legislation was passed and effectuated.

Construction

Construction, too, was never seriously considered for decontrol. Price and wage developments in that sector directly affect the cost of investment by other industries. Because the construction of additional productive capacity was an important aspect of long-term price stabilization, the costs of construction became of central concern to the Cost of Living Council. Because it would reduce economic incentives for additions to productive capacity, high inflation in this sector would compromise and undermine, in a fundamental way, the basic Phase IV objectives of the Council. Thus, keeping the lid on the construction industry was of critical importance.

The second factor behind the industry's “last man out” status was the structure and influence of its collective bargaining process. The industry is about 80 percent unionized, but the bargaining structure is fragmented and decentralized. Consequently, a leap-frogging impulsiveness is built into the system, with the numerous bargaining units each attempting to keep up with and outdo the other. In addition, wage developments in the construction industry have a significant ripple effect into other sectors of the economy. Construction wage agreements tend to be pace-setters for those of other industries, especially industries employing some of the same crafts, such as carpenters and maintenance workers.

The Cost of Living Council wanted to obtain extended control authority for construction beyond April 30 in order to further the Council's efforts to reform the collective bargaining process through the Construction Industry Stabilization Committee (CISC). This committee had been functioning, through regional craft boards made up of labor and management representatives, mostly on a voluntary basis but also under some compulsion from the sanction of mandatory economic controls. The Committee had been making progress, but Dunlop felt that after June 30, controls authority would still be needed to encourage further reform.

Food

Skyrocketing food prices had accounted for a substantial portion of total inflation during 1973; the public reaction had been an important factor in the decisions to impose the March, 1973 meat price freeze, Freeze II, and Phase IV. The memory of this was almost enough to preclude the possibility of complete decontrol. However, an elaborate plan to gradually decontrol the diverse and complex industry piece by piece was seriously considered by the Council. Although this plan was ultimately not accepted, the Council made four individual foodrelated exemptions; but, by April 30, the major portion of food manufacturers was still under controls.

Food was naturally an industry of some importance to the controls program. Like several other important sectors, food was given particular attention through special administrative mechanisms (i.e., Food Advisory Committee and the Food Wage and Salary Committee), and special regulations. From the beginning, the Council had had difficulty restraining food prices. Raw agricultural commodities had been exempt from controls since early in the Economic Stabilization Program; because this segment of the economy is made up of thousands of small farms, food was considered nearly impossible to control effectively. Additionally, it was felt that the classic “competitiveness” of this industry would exert a significant downward pressure on prices.

During Freeze II, under Stage A of the food regulations, food processors and manufacturers were allowed a dollar-for-dollar cost pass-through without

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