Business: Infatuation with Controls

While wage and price controls are still anathema to the vast majority of economists and White House policymakers, a rising chorus is beginning to demand their imposition. Senator Edward Kennedy has centered the economic proposals of his presidential campaign on a six-month wage and price freeze. Barry Bosworth, who directed the Carter inflation guidelines program for two years, now favors mandatory controls. Even a number of conservatives are reluctantly swinging toward controls. Brookings Institution President Bruce MacLaury now supports wage and price restrictions, and Wall Street Banker Henry Kaufman says controls can make a "marginal contribution" in fighting inflation. In a CBS-New York Times poll last month, 65% of the respondents supported Government limits on wage and price increases, while 26% opposed them.

Throughout history, controls have seemed a tempting quick fix for inflation. Nearly 40 centuries ago, the Babylonian King Hammurabi established wage and price limits. They set, for example, the annual wage of a field worker at eight gur (75 bu.) of corn and that of a herdsman at six gur (56.25 bu.). The Roman Emperor Diocletian in A.D. 301 published official price lists that included artichokes and transportation by camel; any gougers were executed. The most recent American experience with general controls was President Nixon's 1971-74 program of freezes, followed by varying degrees of restraint.

From Hammurabi to Nixon, wage and price limits have been almost universally disastrous. Hoarding and scarcities quickly develop as businessmen either stop producing goods or store them rather than sell-at a loss. Mammoth and costly bureaucracies soon tell the corner pharmacist how much to charge for aspirin or a gas station owner whether he can give his mechanic an extra $5 a week. In the U.S., the World War II controls program required 60,000 full-time officials, plus another 300,000 volunteer price checkers.

Once controls are removed, prices almost always explode. The highest annual inflation rate in the U.S. during the past 60 years (18.2%) occurred in 1946, following removal of World War II restrictions. After studying the 1971-74 Nixon program, Princeton Economists Alan S. Blinder and William J. Newton concluded that by early 1975 those controls actually increased inflation by almost 1% over what it would otherwise have been during those years. Reason: policymakers simultaneously removed most restraints on fiscal and monetary policy and thus overheated the economy.

The current inability to arrest price increases has led to the new flirtation with old solutions. Economist Walter Heller still opposes them but says that "somewhere along the line, a dose of wage-price controls may be what is necessary to give the economy some shock treatments and to lower us out of this inflation orbit." Adds Bosworth: "The choices to stop inflation are either a recession, with 10% unemployment for three years, or controls."