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

moderated after persuasion from the White House, but I am not aware of any example of wage increases that have been moderated as a result of such persuasion.

I am aware of two points of view in the Congress hostile to the continuation of the Council. One holds that any government interference whatsoever with private wage and price setting, even if it is implemented only by persuasion, is an unwarranted meddling with the free enterprise system. I would agree with this if all of our product and labor markets were highly competitive, but manifestly they are not. To the extent that the existence of substantial market power in individual firms and unions is inherent in modern industrial society or is permitted by government policy, the Government must retain some responsibility to see that this power is not abused.

The second view is that the Council is so weak as to be useless, and should either be greatly strengthened or abolished to make way for something stronger. Proponents of this view usually want some sort of standby price controls for concentrated industries. In my opinion, the recreation of price control authority at this time would be most unwise. Giving any Government agency authority to control prices could provoke a rash of anticipatory price increases, some of which would then have to be rolled back. Moreover, compliance with the complicated regulations of price controllers adds substantially to the costs. of doing business. Finally, I know of no evidence that price controls permanently restrain inflation-at best they seem to store it up and postpone it. Giving the Council's formal power to control prices would therefore be counterproductive-it is more likely to contribute to inflation than to restrain it.

Mr. Chairman, this completes my statement. I should, of course, happy to answer questions.

The CHAIRMAN. Thank you very much, Dr. Rees.
Dr. Houthakker.

STATEMENT OF HENDRIK S. HOUTHAKKER, PROFESSOR OF ECONOMICS, HARVARD UNIVERSITY

Mr. HOUTHAKKER. Thank you, Mr. Chairman. I appreciate the honor of appearing before this committee, especially when doing so in the company of Barry Bosworth, who has been nominated to direct the Council on Wage and Price Stability. Having known and admired Barry Bosworth for a quite a number of years, I feel he is eminently qualified on both professional and personal grounds, and am pleased that the President has nominated him for this important responsibility.

I have followed the affairs of COWPS from a distance ever since its inception, sometimes with more than academic interest. In fact, if the 1976 election had gone the other way I might have been in Barry Bosworth's position, awaiting the advice and consent of the Senate. In my opinion COWPS has evolved into a necessary and useful component of the economic policy apparatus. During my service on the Council of Economic Advisers a large fraction of my time was taken up with matters that are now within the domain of COWPS, and this was sometimes at the expense of problems that are more properly the concern of CEA.

The two main functions of COWPS are equally important. One is to prevent government, through its rules and regulations, from contributing unnecessarily to inflation. The other is to monitor pricewage developments in the private sector and make suggestions for improvement. Both these functions raise difficult policy issues.

In the case of supervision of Government regulations COWPS is up against two formidable adversaries. One of them is old but as vigorous as ever: it is the pressure of special interests. Presidents come and go, but the client-oriented departments such as Agriculture, Labor, Commerce and Transportation continue to do favors for their constituents without worrying too much about the cost to the rest of the country. The inflation impact statement has proved to be fairly effective in keeping some control over these regulations, though much remains to be done. The role of COWPS in this field is somewhat similar to the role of the Office of Management and Budget in the area of expenditures. Like OMB, COWPS will be unpopular if it does its job properly, and this is why it needs full support from those concerned about the public at large.

The other adversary is of more recent origin but perhaps even harder to deal with. It is zealotry, the belief that some worthy cause is more important than anything else in the world. We live in an age of hysteria, in which claims for public attention have to be strident if they are to be heard at all. Rational policy, except perhaps in times of all-out war, has to be based on the notion of a tradeoff between various goals, but that is precisely what the zealots deny. Anybody who is not 100 percent for their cause is against it. Some of the laws passed by Congress, particularly the sweeping statements that tend to be made in preambles, provide a legal foundation for these uncompromising attitudes. Everything that can be related to one of these causes, no matter how trivial, becomes sacred and by implication immune from economic evaluation. Again the inflation impact statements is needed to protect the public interest.

The principal problem faced by COWPS in the area of government regulations appears to be vast range of subjects that need to be covered. The Federal Register, which is presumably the chief trigger for COWPS action, consists of a fat volume every working day. Inevitably COWPS has to choose. A perfunctory evaluation is sometimes worse than no evaluation at all. It is my impression that COWPS is still in need of a policy on when to make its voice heard. One principle for such a policy should be that all government regulations (except perhaps for national security) are fair game; thus the energy field, which appears to have had little attention, should have heavier emphasis.

The policy issues with respect to the private sector are of a different nature. Clearly COWPS is not merely a reporting agency; it should comment whenever it has a considered opinion, and hold its peace otherwise. But what should its comment refer to? One school of thought, influential in the 1960's and by no means extinct, would have COWPS engage in jawboning. I have strong doubts about jawboning, based in part on some practical experience not only when I was a member of CEA but also when on the CEA staff in 1967-68; if the committee is interested in those episodes, I shall be glad to expand.