Garroting by Guideline

December 6, 1965

It is hard to say whether it is the legal and political or the economic implications of the government’s recent adventures in price-fixing that are most disturbing.

The Administration has no legal authority from Congress to fix prices. Yet by public threats to use its huge stockpiles to flood and depress the market (and also, according to some published accounts, by off-the-record threats of antitrust action, income-tax review and shifting of defense contracts) it has succeeded in forcing the aluminum and copper industries to roll back announced price increases.

Nor did the government state clearly in advance, nor has it stated yet, precisely what its price-fixing standards are, so that an industry or a particular firm may know when it is “violating” them, and by how much.

The best things we have to go by are the government “guidelines” for wages and prices. These turn out to be either very vague or very rigid, depending upon who happens to be involved. If one could state the guidelines as general rules, they would run like this: “Wages in any industry should rise no faster than the national average gain in output per man-hour, or ‘productivity’ (which the government says is 3.2 percent a year); and prices should not go up at all.”

ECONOMIC NONSENSE

If we begin to count up even the government’s own “exceptions” to this, the guidelines dissolve into mist. And if we take a realistic look at the general rule itself, it turns out to be economic nonsense.

Even if we accept the government’s questionable average productivity-gain figure, it is obviously absurd to make the wage increase of an individual worker, or even of all the workers in a single industry, equal to the national average gain in “productivity.” For the “productivity” increase of some workers may be far higher than the national average, and the “productivity” increase of other workers far less. Why should all get the same increase? This would not only be unjust but would retard the flow of workers to the industries where they are most needed.

Again, the “man-hour productivity” that the Council of Economic Advisers “measures” is really man-machine hour productivity. It is not “labor productivity” but the combined productivity of labor and capital; and it has been rising each year not because workers annually work harder but because more and better equipment is put into their hands. If the whole increase went to the workers, and none to the capital investment that made the increased productivity possible, the capital investment (and the increased productivity) would cease.

PRICES ARE GUIDES

Still more absurd is the attempt to hold every price just where it is. The government is trying to apply the Procrustean rule to steel, aluminum and copper, though conditions are radically different in the three industries. Aluminum, for example, even if its price increase had been allowed to stick, would still be selling below its price five years ago. The industry’s return on net worth in 1964 has been calculated at 7.4 percent as compared with a 12.7 percent average for all U.S. industry.

The government’s rigid rule overlooks the whole function of prices in a free economy. Prices are an indispensable guide to producers. The relative profits and losses they lead to determine the ever-changing balance of production among thousands of different commodities and services. It is always harmful to freeze prices. Prices have work to do. Each individual price must be free to tell the truth about conditions in its industry. Government bureaucrats do not know what the price of anything, let alone the price of everything, ought to be. Only the free market, only the unceasing play of supply and demand and competition, can decide. Price-fixing can only choke and disorganize production.

The real author of inflation is the government. It has been averaging an annual cash deficit of $4 billion for the last six years. It has been pushing down interest rates. It has been increasing the money supply recently at an annual rate of 8 percent. It has cheapened the dollar. And now it tries to divert attention from its own inflation (which it calls “expansionary” policies) by making industry the scapegoat.