Thoughts on Phase II

Houthakker, Hendrik
March 1972
Brookings Papers on Economic Activity;1972, Issue 1, p195
Academic Journal
This article questions the effectiveness of the Phase II of the wage-price control program of the United States. It will be a long time before we can say with any confidence whether the introduction of direct controls on wages and prices has been followed by a significant slowdown in their rise. Some good months and some bad months have occurred under the controls, just as good months and bad months occurred prior to their institution. I expect some slowdown in the inflation, but that will not settle the question, for the cause may be the controls or simply the delayed effect of the considerable slack in the economy. This will be a subject of debate in the coming years, just as there was a long debate over whether the investment tax credit actually stimulated investment. No matter how this academic debate comes out, some form of direct controls is likely to be with us for some time. The establishment of direct controls was widely welcomed and the program is still generally popular despite its uncertain achievements to date. The controls are not likely to be abandoned soon unless they run afoul of some important pressure group, and that has not happened so far, despite some grumbling among union leaders and consumers. A strong case can indeed be made for better supervision of the labor unions. In the last few years, the United States has moved toward the situation already prevailing in the United Kingdom, where unions have been able to obtain wage increases regardless not only of productivity but also of the state of the labor market. Since our laws have been inadequate to deal with this problem, the power of the unions may have to be constrained in other ways. Many economists believe that price controls should be confined to large firms, and recent political trends also favor this development.


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