AMENDING THE COUNCIL ON WAGE AND PRICE

STABILITY ACT

TUESDAY, JULY 19, 1977

U.S. SENATE,

COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS, Washington, D.C. The committee met at 10 a.m., in room 5302, Dirksen Senate Office Building, Senator William Proxmire, chairman of the committee, presiding.

Present: Senators Proxmire, Sarbanes, and Lugar.

The CHAIRMAN. I'm going to ask two of your colleagues to come forward so we can have a panel consisting of you, Mr. Bosworth, Dr. Albert Rees, who's director of industrial relations section and professor of economics, Princeton University, and has had great experience and a fine record as you know as head of the Council; and the distinguished Hendrik Houthakker, professor of economics at Harvard University, former member of the Council of Economic Advisors.

Mr. BOSWORTH. Would it be all right if Bob Crandall, who serves as Acting Director, joins me at the table?

The CHAIRMAN. Fine. All right. Supposing we start off with Dr. Rees. You might give us your statement and then Professor Houthakker, and then Professor Bosworth.

Before you do that, I have an opening statement I'd like to make.

OPENING STATEMENT OF CHAIRMAN PROXMIRE

The CHAIRMAN. Today's hearing is on the subject of S. 1542, an administration bill which I introduced. Its purpose is to amend the Council on Wage and Price Stability Act so as to extend the life of the Council to September 30, 1979, to provide for a moderate increase in the Council's authorized expenditures, and to clarify some of the Council's powers.

Last Friday President Carter announced a major reorganization of the White House and executive office of the President of which the Council on Wage and Price Stability is part. The Council is to be retained, but as I understand it, the new plan does not call for a moderate increase in authorized expenditures as does S. 1542, some of the work that the Council had done will be shifted elsewhere, and the Chairman of the Council of Economic Advisors will replace the Secretary of the Treasury as Chairman of the Council on Wage and Price Stability. Chairman Schultze and Director-designate Barry Bosworth will both be here today so that the committee may understand what

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impact these changes will have on COWPS and its ability to perform its legislative mandate.

The Council was established in 1974 as the primary agency in the executive branch for monitoring and analyzing inflationary developments in the economy at the firm and industry level. The staff of the Council is small and the issues it is supposed to deal with are many and they are certainly complex. The stubborn inflation that is imbedded in our economy had its roots some time ago. It persists not because monetary and fiscal policies have not attempted to deal with it, because those traditional means of fighting this inflation are not sufficient even though they may still be necessary.

When the Council was created it was very clear that the Congress did not intend to create a powerful agency. It had no intentions of making any move toward mandatory controls. Quite the contrary, it intended the Council to perform its mission by means of investigations and the publishing of reports on situations which it found to be inflationary. Public opinion was considered the key to reinforce the Council's efforts in restraining inflationary actions by businesses or unions or government agencies.

I am a little ambivalent in my feeling about the Council. I feel that there's some argument for supporting it in view of the fact that we need a watchdog agency such as COWPS to help in the inflation fight. It is painfully evident that we are making only slow progress in beating down the underlying inflation rate to less than its present 6 percent annual rate. Earlier this year we were even losing ground as food and materials prices surged upward. Last month happened to be a good month in the wholesale price area and there is promise that the few months ahead of us might be good, but I think all of us realize that we still have a very serious problem.

The job of the Council is to educate the participants in the economy as to the reasons for rising prices and to engage the public interest in strengthening voluntary compliance with its findings, and to prevent. cost pressures from being magnified as they are transmitted through the economic system. Unfortunately, we must realize that the Council cannot be expected to deliver any stunning victories in this long fight against inflation. We must also realize that there is little chance that inflation can be brought under control with the mehods that are currently in use. We have a continuous inflationary bias in our private market economy that general fiscal and monetary policies aimed at restraint of demand cannot erase. These methods exact an intolerable cost on the economy in terms of unemployment and reduced output. Unfortunately, nearly everyone recognizes that the current situation. is bad, that new methods must be found to help, but nearly everyone involved in making the decisions to increase prices and wages is also somewhat averse to change for fear that they will be losers in the process. This need not be the case at all. And it is in this respect that the Council may be able to perform effectively.

As I say, whether this Council should continue is not clear. The administration, labor, management all oppose wage-price controls, voluntary prenotification or even any kind of an aggressive jawboning. So what remains? The Government sector is somewhat influenced perhaps. Sometimes the feeling is that OSHA, which was designed to provide for the safety and health of our workers, is unfortunately

discouraged. Dairy farmers who have a right to a just return and aren't getting it by any means, work far longer than any other people in our economy and get less than two-thirds of the income and have enormously increased their productivity and efficiency and get very little reward. They seem to be the victims of this agency. And very little pressure on some of the big energy areas where we have suffered our biggest price increases.

The witnesses that we shall hear from today bring with them broad experience and knowledge about the problems of trying to erase inflation. Hopefully they will provide suggestions as to how the Council on Wage and Price Stability may be more successful in its efforts.

First, we shall hear from a panel of economists each of whom has spent considerable time studying the inflationary problems I have talked about. Albert Rees is currently professor of economics at Princeton University, where he has also served as provost. Dr. Rees was the Director of the Council on Wage and Price Stability in 1974 and part of 1975. Henrik Houthakker is currently professor of economics at Harvard University and Dr. Houthakker also served on the Council of Economic Advisors under President Nixon and I think has impressed all of us with his very impressive analytical ability and his excellent judgment. Barry Bosworth is, of course, the Director-designate of the Council on Wage and Price Stability and has been a senior fellow at the Brookings Institution since 1976, and he's the man on whom we shall act later today when we send his nomination to the Senate.

Following the panel we shall hear from Andrew Biemiller, director of the department of legislation at the American Federation of Labor and Congress of Industrial Organizations, and Louis G. Peloubet, controller of Union Carbide Corp. representing the Business Roundtable.

Dr. Charles Schultze, Chairman of the Council of Economic Advisors, will be here a little later after he is done testifying on the current budget forecasts before the House Budget Committee.

Gentlemen, I look forward to hearing your views on the extension of the Council and its role in helping to reduce inflation.

Dr. Rees, go right ahead.

STATEMENT OF ALBERT REES, DIRECTOR, INDUSTRIAL RELATIONS SECTION AND PROFESSOR OF ECONOMICS, PRINCETON UNIVERSITY

Dr. REES. Mr. Chairman and members of the committee, I am most pleased to have this opportunity to express my views on S. 1542, a bill to extend the life of the Council on Wage and Price Stability. In my opinion, this bill should be enacted.

During the 2 years since I left the Council on Wage and Price Stability, I have followed its work with much interest, and I am convinced that it is doing a valuable job. This job has at least four main components.

First, the Council files views before independent regulatory agencies such as the ICC and the CAB in support of regulatory action that would restrain unwarranted rate increases and benefit users. In

my judgment, some of the independent regulatory bodies have been consistently overprotective of regulated carriers and have given too little consideration to the interests of passengers, shippers, and potential entrants now denied entry to the regulated sector. By its carefully reasoned filings, the Council is helping to move these regulatory bodies in the right direction.

Second, the Council is regularly filing its views before some of the newer regulatory bodies within the executive branch, such as FDA, OSHA, and EPA, urging that regulations to protect workers, consumers, and the environment be designed so as to minimize inflationary impacts. The issues involved in benefit-cost analysis of protective regulation are very difficult and complex ones, and I do not mean to claim that the Council is right in all of the positions that it takes. However, its analyses have been careful, well-documented, and usually persuasive. I believe that it is very useful to have the analysis of a second agency before costly new regulations are put into effect. To draw an analogy from the field of medicine, this is like the value to a patient of the opinion of a second surgeon in avoiding unnecessary surgery.

Third, the Council has been monitoring price developments in the private sector of the economy, particularly in such industries as steel, automobiles, and aluminum in which a small number of major producers have substantial market power. In the great majority of cases, the Council has found that price increases were justified by cost increases and demand conditions. But it is precisely because the Council does not routinely condemn all price increases that its views carry weight when it does regard a price increase as unjustified. Moreover, the mere knowledge by price setters that their costs and prices are being monitored may induce some restraint.

Since World War II, all Presidents of both parties have been involved at times in deciding whether price increases in the concentrated industries were excessive. The President cannot be expected to make such judgments without expert advice. In the absence of the Council on Wage and Price Stability, such advice would have to come from the Council of Economic Advisers, as it did during the Kennedy and Johnson administrations. But this would require a substantial expansion of the staff of the Council of Economic Advisers, and probably an expansion of its powers to enable it to collect confidential company data as the Council on Wage and Price Stability now does. In short, if we did not have the Council on Wage and Price Stability, I think we would be forced to recreate it under another name.

The fourth function of the Council on Wage and Price Stability is to make and release estimates of the cost of major collective bargaining settlements. Such estimates are of great value in monitoring wage increases, and are not now made by any other agency. The parties to the settlement sometimes question the accuracy of these estimates, but the parties themselves could improve their accuracy by furnishing the Council with better data.

The Council has not been attempting to intervene in the process of collective bargaining, a posture that in my view is correct for two reasons. First, recent inflation in the United States has not been wagepush inflation. Second, there is no evidence that a voluntary incomes policy in this country can have any appreciable effect on wage negotiations. We have had several examples of price increases that were