Jawboning attacks the symptom rather than the disease, and it is not very good even at dealing with the symptom. It does not take long for businessmen to catch on, and to announce price increases higher than they really want so that they can climb down amidst official congratulations on their statesmanlike restraint. The net result, usually, is that the Government winds up endorsing price increases whose validity should be tested by competition. Moreover, jawboning tends to be highly selective (in the 1960's at least half of it involved metals) and to institutionalize price leadership. Jawboning of wages is, if anything, more futile still and undermines normal bargaining practices. Neither can I see much promise, incidentally, in the unholy alliance between big business and big labor that my distinguished colleague John Dunlop is trying to put together.

Öfficial efforts in the wage-price area should concentrate not on modifying the actions of those possessing market power, but at reducing that power by stimulating competition. COWPS can play a valuable role by documenting the many barriers to competition, and recommending measures against them. It should look not only at failures of competition among domestic producers, but also at the increasing restraints on competition from imports. The steel industry, the favorite target of jawboners, provides examples of both kinds of market imperfection.

The one thing that COWPS should not do is hint that price and wage controls may be used as a last resort if businessmen and labor leaders do not behave. This is an outright invitation to undesirable price behavior, and particularly to the suppression of the price reductions that are an indispensable element in overall price stability. Threats of this kind merely anticipate the common failing of price controls, namely that they make maximum prices into minimum prices. The history of price controls from Hammurabi through Nixon is one of almost universal lack of success; any remaining belief that our macroeconomic problem can be solved along those lines must now be considered irrational.

As the committee will have gathered, I favor extending the authority of COWPS. Indeed I would suggest a longer extension than 2 years because successive directors have had to spend too much time arguing for the life of their agency; the short life also causes personnel problems. This does not mean COWPS should be made permanent-the "sunset" idea has a great deal of merit. Four years would seem to be the optimal time span; this will permit reconsideration early in the next Presidential term.

The CHAIRMAN. Thank you, Dr. Houthakker.

Dr. Bosworth.

STATEMENT OF BARRY BOSWORTH, DIRECTOR-DESIGNATE, COUNCIL ON WAGE AND PRICE STABILITY AND CURRENTLY SENIOR FELLOW, THE BROOKINGS INSTITUTION; ACCOMPANIED BY ROBERT CRANDALL, ACTING DIRECTOR, COWPS

Mr. BOSWORTH. I testified before this committee last December in more detail about the problems we face. I have a statement but I

thought I would just submit it for the record and try to quickly summarize its main points.

The CHAIRMAN. The statement will be printed in full in the record. [Complete statement of Dr. Bosworth follows:]

PREPARED STATEMENT OF BARRY BOSWORTH

I would like to sketch for the Committee in general terms the intended future activities of the Council on Wage and Price Stability upon the extension of its authority. Since I have not been intimately involved in its past operations, my comments will be short on specifics. Mr. Robert Crandall, who has served in recent months as the Acting Director, has accompanied me to answer questions about past activities if they should arise.

I would like to focus my remarks on three areas: The general framework of government efforts to reduce the inflation rate; the role of the Council on Wage and Price Stability within that framework; and specific issues of the budget and the authorizing legislation.

GENERAL COMMENTS

It has become obvious that the causes of inflation are far more complex than any simple matching of aggregate demand and supply would suggest. Instead of focusing on aggregate measures, I find it useful to view the inflation process in terms of two distinct stages. First, there is an initial set of shocks that distort the existing wage and price structure. Such shocks may stem from excessive overall demand, but they can also be produced by numerous other factors, including serious disruptions of supply or demand in major individual markets, major exchange rate adjustments, or changes in government policies and regulatory activities in individual industries.

Second, there is a period during which these initial disturbances are transmitted and magnified within the rest of the economy as prices and wages in other markets rise in a reflection of higher production and living costs. Thus, the inflation gathers momentum and is sustained by the efforts of others to recover lost real income or to maintain their relative income position with others.

In the past, inflation arising out of changing price relationships within individual markets was ignored because these changes were viewed as selective price adjustments where higher prices in some markets would be offset by declining demand and prices in others. But for several reasons, there is considerable downward rigidity of prices and wages, and these offsetting adjustments do not occur smoothly and quickly.

We have also learned that attempts to restrain this type of inflation through deflationary fiscal and monetary policies can be extremely costly in terms of unemployment, rising crime rates, increased welfare needs, and other social ills which accompany the lack of job opportunities. Such a response to the increased food and fuel price increases in 1973/74 has placed us in our present predicament. At the same time, I believe there is a general desire to maintain a free market economy with emphasis on freedom of individual choice; and to avoid a turn toward government control over all prices and wages. Recent experience has illustrated the great difficulties, inequities, and complex problem involved in such control measures.

If we are to avoid the extremes of recession or controls, emphasis must be placed upon efforts to identify and offset specific inflationary threats at the level of individual markets and industries. Such a focus on the microeconomic aspects of inflation is the primary purpose of the Council on Wage and Price Stability. The Council's efforts are concentrated in two areas: (1) the identification of specific inflationary shocks or disturbances, with an effort to recommend methods of preventing their occurrence or dampening their impact on the price level; and (2) the development of procedures for dampening the transmission or momentum aspects of the inflation process, where everyone is engaged in a selfdefensive effort to protect himself from the inflationary actions of others.

Particularly in the second area of dampening an ongoing inflation, it would be very misleading to imply that the Council, or even the Federal government, can by itself solve the problem. Everyone is caught on a treadmill. One might be willing to moderate his own inflationary wage or price actions, but he cannot do so without assurances that others will do the same.

Even in the area of highlighting and attempting to propose actions to offset initiating forces for inflation, the Council's success has been limited by the conflicting priorities of those with the actual decision-making power. But, perhaps, if the inflation implications of specific public and private actions are highlighted, some mprovement can be achieved. I believe that a successful effort to reduce inflation will require that it be given greater precedence in both public and private decisions, and that some of our goals in other areas will have to be delayed or modified.

However, even if the Council's direct impact on inflation is small, the benefits can be substantial when we remember that the historical record implies that efforts to reduce the inflation rate one percent through restrictive fiscal and monetary measures costs between $50 and $100 billion in lost production and 1.5 million unemployed annually.

ACTIVITIES OF THE COUNCIL ON WAGE AND PRICE STABILITY

The Council's activities have been concentrated in two areas of (1) increasing the government's awareness of its own contribution to the inflation problem through decisions with respect to regulation and new legislation initiatives, and (2) the monitoring of inflationary developments in the private sector. In both of these areas the Council has the responsibility to highlight the implications for inflation and to promote the consideration of alternative actions which would have less of an inflationary impact.

Government Operations. In many respects the government itself is a major source of the shocks and distortions which give impetus to this inflation. Through the initiation of new programs, with no consideration of the ability, or of the time required for the adjustment of supply, shortages have been created and prices increased unduly. In the area of economic regulation little consideration has been given to changing technology with has altered competitive conditions and reduced the need for detailed regulation of some industries. Today we find that the regulators have frequently been captured by those they set out to restrain, and the reduction in the degree of regulation is most vociferously opposed by the regulated interests themselves. In effect the government has provided the equivalent of a cartel in which competition is blunted and inefficiencies are introduced. In recent years there has been an enormous growth in the magnitude of "social" regulations which by setting standards for industries do significantly raise costs. I believe that there is substantial agreement that government mismanagement of farm policies was the primary factor responsible for the explosive rise in food prices after 1972. Just recently, efforts to restrict imports through tariffs, quotas, or so called "voluntary" trade agreements have become a significant inflationary factor through increasing prices paid by consumers.

Despite the magnitude of these activities, little attention has been directed to their inflationary effect. It is interesting to note that the steel industry action of raising prices in late 1976 was a cause for newspaper headlines. Yet, the decision to raise milk support prices, which had a substantially bigger impact on the Consumer Price Index, was given only passing notice.

These observations should certainly not be interpreted to imply that all of these actions should not have been taken, or that they were not desirable for other reasons. But, their inflation implications should be clearly recognized and made a part of the decision-making process. Also, there is frequently considerable discretion in the choice of the means for achieving these goals; and the alternatives should be carefully examined with the objective of choosing the lowest cost option. I sharply disagree with those who imply that these government actions should be immune from such considerations of efficiency or that economic impacts are irrelevant.

It is not the Council's task to decide whether these actions should be taken; but it does have an obligation to insure that the inflationary implications are evaluated and reflected in the decision.

The Council has been active in evaluating government contributions to inflation in the past, but doubts can be raised that those activities have had a significant impact. Primarily, this lack of influence has been the result of indifference by those in charge of the actual decisions and a belief that the Council's activities did not have the full support of the Administration or the Congress. Some efforts will be made to change this situation. As a means of avoiding the confrontation framework which has characterized the Council staff's relationship with some agencies, an effort is being made to set up an interagency review and

discussion group through which the agencies can develop their own procedures, with the Council's assistance, for measuring the cost of alternative approaches to achieving a given goal and the costs of pushing standards of performance to higher levels. The Council will continue to submit filings with respect to significant cost and price increasing actions of the agencies.

In other areas, the effectiveness of the Council will be dependent upon the interest taken by the Administration and the Congress in its specific studies. The current structure, with the major advisors to the President as members of the Council, should provide a mechanism for transmitting the Council's work to the policymaking arena. An effort is being made to include the Council staff as a participant in interagency study groups for those activities which have significant inflation implications.

In the near future the Council staff will also expand its study efforts with respect to specific problem areas where government policies are of dominant influence. These studies will be focused upon such markets as those for food, medical care, and housing.

Monitoring of Private Markets. In the past government economic policies have frequently gone awry because of a lack of information about conditions within individual markets and systems. One of the primary functions of the Council would involve a continual monitoring of costs, prices, capacity utilization, and other indicators of economic conditions for major individual markets which have a history of inflationary problems. Much of the information required for such an undertaking is presently available from government statistical agencies. In a few cases, however, the Council will need to obtain the cooperation of firms and employee groups in order to obtain data on a regular basis which are not published by the government. As discussed later, some modifications in the authorizing legislation are being requested to insure the confidentiality of such data for the participating groups. As a part of this effort, firms in the more critical industries will be asked to inform the Council about pending price actions and will be asked to participate in prior discussions of those price changes with respect to the causes and their impact on the overall inflation rate. Such prior knowledge is presently available for major union wage contracts, since expiration dates of contracts and dates for negotiation are public knowledge. The Council has also been receiving prior information on price actions in a number of industries.

Second, as announced in the earlier anti-inflation program, the Council will undertake, in cooperation with other agencies, a program to provide prior warnings of potential future bottlenecks and inflationary pressures within individual industries. With early knowledge the adjustment to these problems can be accommodated with less inflationary pressures on the overall economy. Much of this work has already begun.

The proposed program would have several major features:

(1) The Council on Wage and Price Stability would be asked to coordinate the development of a detailed forecast of inflation trends within the confines of the overall economic outlook as provided by the current government forecasting process. However, the forecast would differ from the usual exercise in that emphasis would be placed on assessing the probability that individual problem situations would occur and their inflationary effect rather than providing a single point estimate of future price and wage increases. The process would include a focus upon industries which: (a) are important in the overall production process; (b) have had a history of price fluctuations; (c) have a meaningful economic concept of capacity; (d) have a limited range of substitutes; (e) have major upcoming wage settlements; or (f) have significant relationships to international markets. The energy industry and agricultural commodities will be given special emphasis because of their potential for intensifying inflation pressures in the future. For example, for industries with significant capacity constraints, estimates would be prepared of the range of potential deviation from the basic forecast required to generate supply problems.

(2) More effort will be devoted to investigating "worse case" scenarios for food prices and the prices of other commodities whose supply or demand is inherently unstable so that the costs of compensatory actions could be evaluated against the probability of a disruptive occurrence. In many of these situations there is a greater interest in the range of potential outcomes and the cost of reducing the variability of the forecast, than in the "best guess" estimate itself.

(3) Estimates will be prepared of future increases in capacity, for industries where it is important, both on the basis of current patterns of investment surveys and from direct contacts with the industry about specific projects.

Much of this material is presently available or could be obtained through coordination of efforts with agencies such as Commerce, Labor, Interior, and F.P.C., and private trade associations. It needs only to be centralized and coordinated with other parts of the economic outlook. For example, there should be a means of assessing the likelihood of deficient electrical generating capacity in future years and of assuring that such information is available as an input to major stabilization policy decisions.

Third, the Council staff will undertake studies of individual problem areas which raise particular threats to inflation. An example of such work is provided by the recent staff study of the ability of the home insulation industry to accommodate a rise in demand without significant price pressures. The current large increases in material costs for home-building should also be of such special concern. There is a need for a detailed evaluation, in cooperation with the industries involved, of the adequacy of capacity in the basic material industries; and a study of the impact of potential remedies if a specific problem should be found.

AUTHORIZING LEGISLATION AND BUDGET

The Administration is asking that the Council be renewed for 2 years ending September 30, 1979. The Council structure and operating functions would be unchanged from previous years, but some minor changes in budget authority and in technical details concerning the protection of confidential data are being requested.

The legislation which expires on September 30, 1977 includes a ceiling of $1.7 million per annum. It is recommended that this be raised to $2.1 million. In his inflation message in April, the President asked the Congress to approve a strengthening of CWPS. This was reflected in a fiscal year 1978 budget request of $2.1 million. Since that time, the President has undertaken a thorough review of the Executive Office of the President, and he has concluded that this more important role for CWPS can be accomplished by drawing upon expertise in other agencies and leaving CWPS at a full-time personnel level of 39.

In addition, there is a request for a few minor changes in the language of sections 2(g) and 4(f) of the Act so as to clarify Congress' intent in granting the Council power to collect confidential data and to protect it from disclosure. These changes are needed in order to facilitate voluntary submissions of data without formal subpoenas or periodic report orders.

Finally, in Senate Bill 1542 the elimination of the position of Deputy was proposed. However, upon reflection, this designation seems useful for delegating authority when the director is not available; and it may be of assistance in conducting the Council's business with labor and industry groups and with other agencies. The title will be assumed by one of the senior staff members and does not affect the decision to cut the administrative staff by 30 percent. The Council's staff will consist of 39 full time positions, and 6 temporary research assistants. Of the 39 positions, 20 will be filled by senior economists. The CHAIRMAN. How does that vary from the present situation as to number of senior economists? Is that fewer?

Mr. BOSWORTH. No; it gives us room to hire a couple more people over what we had previously.

The CHAIRMAN. Could you or Mr. Crandall explain to the committee the effect of President Carter's reorganization plan on the working of the Council?

Mr. BOSWORTH. Well, in terms of size, the President's position basically is a decision to pull back his previous request for an increase of 10 in the size of the Council.

The CHAIRMAN. I'm sorry. It would do what?

Mr. BOSWORTH. It would pull back the previous request that was before the committee for an increase of 10 in the size of the Council. The CHAIRMAN. A decrease?