Tape 68 - Will automatic wage controls work

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Announcer	Welcome once again	0:02
	as MIT professor Paul Samuelson	0:02
	discusses the current economic scene.	0:04
	This biweekly series is produced	0:07
	by Instructional Dynamics, Incorporated	0:09
	and was recorded January 25, 1971.	0:11
Paul	For some reason or other,	0:15
	I get a considerable volume of mail.	0:16
	Much of the mail that comes across my desk	0:19
	is crackpot mail.	0:22
	However, even in the crockpot mail at different times,	0:25
	different subjects come into prominence.	0:30
	And I would say that at the present time,	0:32
	I am getting a great deal of mail	0:35
	by people who say, in effect,	0:37
	Let's hang the union leaders.	0:40
	Let's fight organized labor.	0:42
	Let's have direct wage controls.	0:46
	Now, I don't mean to suggest that you have	0:52
	to be a crackpot to hold that view,	0:54
	but I do want to emphasize that, increasingly,	0:57
	there is a body of opinion which is getting fed up	1:01
	with the way it considers to be the cause	1:04
	of the present inflation, namely,	1:08
	high collective bargaining wage settlements.	1:10
	Now as indicative of this trend,	1:15
	let me mention a few items.	1:19
	First, in the New York Times magazine section,	1:22
	for some time, I think it was in December,	1:28
	Edwin Dale of the New York Times,	1:31
	who was a very well-known reporter on economic matters,	1:33
	wrote an article.	1:36
	It came to my attention because the Reader's Digest	1:38
	was considering the question	1:42
	as to whether it would be a suitable article	1:45
	for condensation and for publication in the Reader's Digest	1:49
	and they asked quite a number of economists	1:52
	to make some comments upon the article.	1:55
	Now, what it is that Dale said was this:	2:00
	All over the world, there's something	2:06
	of a wage explosion going on.	2:08
	Whenever money wages rise faster than productivity rises,	2:12
	that will push up prices.	2:20
	Such a process is going on today in America.	2:23
	Profits are not to blame and, therefore,	2:26
	he has a very simple solution, really, if he's correct,	2:30
	for handling the problem.	2:33
	Namely, Congress should legislate that no compensation,	2:36
	no wage rate be permitted for the next couple years,	2:43
	perhaps, to rise more than half a three percent annual rate.	2:47
	This will be true for not only the blue-collar worker	2:52
	but will be true for the white-collar worker	2:54
	and will be true for the president of the corporation,	2:57
	his total compensation cannot increase by more	3:00
	than three percent per year.	3:04
	This doesn't mean that somebody who's a year older	3:08
	and who qualifies for a more important job,	3:11
	if it is a genuine reclassification of his abilities,	3:14
	promotion, is not going to be permitted	3:18
	to have a bigger increase than three percent,	3:23
	but leading off the problem how you would decide	3:26
	if people tried to evade the law by reclassifying people,	3:30
	how would you decide whether that was fraudulent	3:34
	or whether it was legitimate?	3:35
	The presumption would be that anyone who's in the same job	3:38
	not be allowed to have more	3:41
	than a three percent increase in wages.	3:43
	Just to be even-handed, Dale suggests that the dividends	3:48
	not be allowed to go up by more than three percent	3:51
	because he thinks of this, in a sense,	3:55
	the compensation for capital, I suppose.	3:57
	That is an inconsistent part of his plan	4:02
	because he is saying that the inflation today and tomorrow	4:04
	is related to an increase in costs and wage costs	4:10
	and I don't think that it can be potently argued	4:15
	that dividends are an effective cost,	4:18
	certainly not in the short run.	4:21
	So, perhaps the restriction on any increase in dividends	4:23
	is part of a public relations package	4:28
	to make more palatable this particular measure.	4:32
	Let it be clearly understood, though,	4:37
	that the Dale proposal is to have no regulation or profits,	4:38
	no regulation of prices.	4:46
	That is the beauty of the plan	4:48
	from an administrative viewpoint	4:51
	in the view of the man who proposed it, Edwin Dale.	4:52
	There is to be no profit control.	4:57
	There's to be no excess profits, tax.	4:58
	You simply legislate no increase in wage rates	5:03
	and that's how you handle the problem	5:08
	of modern, present-day inflation, wage costs push.	5:12
	Well, I mention this particular proposal	5:21
	because it's just one of many similar proposals.	5:25
	I had a letter from a gentleman who suggested	5:28
	that there be a constitutional amendment	5:31
	to the Constitution of the United States	5:33
	that never, ever, ever should there be more	5:35
	than a three percent increase in wages permitted.	5:39
	You would be violating the fundamental law of the land.	5:42
	Just today, I was interviewed in a television program	5:49
	for the Canadian Broadcasting Company, the CBC,	5:55
	that's the government-owned network,	6:01
	a program like some that we have on our networks,	6:04
	60 Minutes, that sort of thing,	6:10
	semi-educational although for mass consumption.	6:13
	And in the course of that interview,	6:17
	I learned that in Canada,	6:19
	this attribution of inflation	6:22
	to union members is very rampant.	6:26
	There was a questionnaire asked of a broad sample	6:30
	of the Canadian public and a very sizeable fraction	6:33
	of the respondents attributed	6:40
	the current inflation in Canada,	6:43
	which by the way, we would be glad	6:46
	to settle for in this country	6:48
	because Canada has had the least increase in prices,	6:49
	rate of increase in prices in recent year	6:55
	of probably any of the countries in the advanced world.	6:58
	On the other hand, it's had the most unemployment,	7:04
	highest percentage of unemployment practically	7:07
	of any of those same countries	7:09
	and I don't think we would envy them that unemployment rate.	7:12
	But among the Canadian respondents,	7:16
	there was shown to be a very strong antilabor sentiment.	7:19
	The present prime minister of Canada, Trudeau,	7:25
	is a very dashing, swinging figure.	7:29
	He apparently has a great deal of popularity in the country.	7:33
	He's almost like Bobby Kennedy in his ability	7:38
	to attract diverse groups.	7:44
	When Bobby Kennedy was in Gary, Indiana,	7:47
	sometime before the assassination,	7:52
	the Canadian who interviewed me said he was just struck	7:55
	to see Lithuanian blue-collar workers	8:00
	reaching our their hands to Bobby Kennedy	8:03
	and crossing hands with black hands of the steel	8:07
	and other workers in Gary, Indiana.	8:14
	They were being united by this particular figure	8:17
	even though an earlier primary,	8:21
	the George Wallace had had a tremendous appeal	8:24
	to the backlash vote	8:27
	among the same Gary, Indiana ethnic groups.	8:29
	Well, Trudeau has so many of these same qualities	8:35
	but he combines it with the fact that,	8:39
	as a former labor lawyer,	8:42
	he is quite militant in his opposition to the unions	8:43
	and, of course, it's especially convenient in Canada	8:49
	because the most powerful unions, the largest unions,	8:52
	are international unions and are really U.S. unions	8:55
	in many respects, like the UAW, United Auto Workers.	9:01
	It's exactly the same union,	9:06
	the scales are not exactly the same	9:08
	but they are very much geared to each other,	9:10
	whether you work in Windsor, Canada	9:12
	or whether you work across the border in Detroit.	9:14
	I would take more seriously this groundswell	9:19
	of antilabor opposition in the Canadian public opinion poll	9:23
	would it not for the fact that I noticed	9:30
	there also was a very heavy response to the question,	9:31
	Do you think that the unemployed are unemployed	9:41
	because of their own fault?	9:44
	And because we coddle the unemployed	9:47
	in the modern welfare state,	9:52
	that the welfare is too easy to get and too luxurious.	9:54
	And as I recall a really very sizeable fraction	10:01
	of the population, something like 41%,	10:04
	said yes, it's because of the laziness	10:07
	of the unemployed person, his own fault	10:11
	and because, given the opportunity	10:13
	of modern welfare payments,	10:16
	he refuses to work,	10:18
	that is, in good measure responsible for his unemployment,	10:20
	for the overall levels of unemployment.	10:25
	I don't really know why if a chap takes the view	10:27
	that it's his lazy brother-in-law	10:31
	through his own fault who's now out of work,	10:34
	in contrast to himself,	10:36
	why he doesn't reflect that the same brother-in-law	10:40
	was no doubt equally lazy and has shown no deterioration	10:44
	of personal character between, let's say,	10:49
	the year 1968, when both in Canada	10:53
	and in the United States,	10:57
	there was a much lower degree of unemployment	10:58
	and that same chap was employed	11:01
	rather than being unemployed.	11:06
	I suppose it's always endemic in a free society,	11:09
	in a mixed economy, in a semi-bourgeois economy,	11:13
	to be resentful about reform movements,	11:19
	about welfare movements.	11:24
	Half the time in our lives we spend in voting them in	11:25
	and half the time we spend in complaining	11:30
	about what it is that we have voted in.	11:34
	Well, let me address the problem	11:40
	of whether direct wage controls,	11:45
	without direct controls, anything else,	11:51
	are the indicated answer.	11:54
	I think the first thing that has to be said	11:57
	is that if you take the present inflationary period,	12:00
	which goes back certainly to about the middle of 1965,	12:04
	prior to the middle of 1965,	12:10
	there are only vague signs	12:12
	of any quickening of price increases.	12:15
	The wholesale price index was more or less stable,	12:18
	a very remarkable fact, from something like 1958, 1959	12:22
	to something like 1964, 1965.	12:28
	So the present inflation in its beginning, its genesis,	12:31
	it must be said, was not the cost push,	12:37
	was not attributable directly to collective bargaining,	12:42
	to human leaders or to the militant rank-and-file.	12:47
	This doesn't mean that there wasn't collective bargaining.	12:53
	It doesn't mean that many union leaders were not militant.	12:55
	Fact, some of them were not sufficiently militant,	12:59
	lost their jobs.	13:01
	It does not mean that the rank-and-file	13:03
	have not been interested in striking for better causes	13:05
	but it does mean that the percentage wage increases	13:09
	in collective bargaining settlements	13:14
	in the years 1965, 1966, 1967 would look extremely modest	13:17
	in comparison with recent settlements,	13:25
	which have tended to average	13:28
	more like seven percent per year than three or four percent	13:31
	and since nobody believes that the overall increase	13:37
	in the rate of productivity	13:40
	is of the order magnitude of seven percent,	13:42
	there obviously has been some upward pressure	13:46
	on prices and on profit margins	13:48
	involved in the recent settlements.	13:53
	What's happened, of course, is we've had a drama	13:56
	in, so far, two acts.	13:58
	We began with demand pull inflation,	14:02
	too much money spending,	14:05
	chasing a limited supply of the goods	14:07
	that are producible at, more or less, full employment	14:11
	at, more or less, full capacity.	14:15
	I think that almost all economists are agreed on that.	14:18
	It doesn't matter whether you are a monitorist	14:24
	who thinks that most or all of the explanation	14:28
	of that excess of demand pull spending	14:33
	came from crimes of the Federal Reserve system	14:35
	in creating too rapid an increase in the money supply	14:40
	or whether you are like me, not a monitorist,	14:44
	one who believes that the Federal Reserve deserves	14:51
	some of the credit and some of the blame	14:54
	for the behavior of aggregative purchasing power	14:56
	but who believes at the same time	14:59
	that the loss in circulation of money	15:01
	is not a fundamental constant like the speed of light	15:04
	or the quantum of action,	15:07
	but rather is something which is systematically influenced	15:11
	by the strength of fiscal policy,	15:15
	by the strength of private consumption demands	15:18
	and private investment demands	15:23
	and which, this is very important,	15:26
	the loss of circulation of money is increasable	15:28
	by a militant fiscal policy	15:32
	involving budgetary deficits and so forth.	15:36
	Well, whatever your specific theory of effective demand,	15:39
	you and most economists will be in agreement	15:48
	that the current inflation, in its first act,	15:50
	began with demand pull inflation.	15:54
	Now, as a result of that,	15:57
	a union member who has not had any special amount	16:00
	of overtime and who has not been upgraded	16:08
	and has just been working in the same standard job,	16:10
	he ironically found himself in those same years	16:15
	falling behind, if not absolutely, and in many cases,	16:19
	once you corrected for taxes, the surcharge,	16:24
	once you corrected for inflation,	16:27
	the increase in the Consumer's Price Index,	16:29
	the resulting deflated real disposable income	16:32
	of that sort of person was down.	16:37
	But it isn't necessary to make people very militant	16:40
	and very unhappy and very class-conscious	16:44
	for them actually to have had a decrease	16:47
	in real disposable income	16:50
	if has been true throughout most of American history.	16:52
	An American worker feels entitled to, each and every year,	16:57
	an increase of say two-and-a-half percent	17:02
	in his income in real terms.	17:05
	That's why he's able to afford a car	17:07
	when his grandfather couldn't.	17:09
	That's why he's able, perhaps, to afford,	17:11
	and his wife to afford, two cars, a Volkswagen,	17:13
	when his father couldn't.	17:17
	This is the general improvement that's been going on	17:18
	and which people have become accustomed to.	17:22
	Well, it's no secret that the typical rank-and-file member	17:24
	of a collective bargaining unit	17:31
	found himself not getting the usual increases	17:33
	in the Vietnam War period.	17:37
	And so, as the curtain went down on act one,	17:41
	the curtain was being rung up, of course, on act two,	17:47
	which was cost push inflation,	17:50
	a very militant drive on the part	17:54
	of the rank-and-file of the unions	17:58
	to try to recoup their position,	18:00
	try to restore their position.	18:04
	You see this very clearly, of course,	18:06
	in the General Motors settlement.	18:08
	The first-year settlement is much more generous	18:10
	than the next two years' settlement.	18:12
	So, demand pull of one time inevitably,	18:15
	as day is followed by night,	18:20
	will be followed by cost push.	18:23
	In terms of equity, therefore,	18:29
	I think that a writer like Dale has something to consider	18:30
	as to whether having let the balloon go up	18:36
	with respect to the Consumer's Price Index.	18:41
	You are going to deprive a very articulate	18:43
	and very active group of its right of regress,	18:47
	its catching up.	18:51
	Of course, when will an inflation ever come to an end	18:53
	if everybody wishes to catch up in turn?	18:57
	We have models, as economists,	19:01
	of inflation of a never-ending type	19:04
	based upon the desire of each person	19:08
	to have what he regards as a normal share of the GNP	19:12
	but the totality of the claims upon the normal GNP	19:16
	add up to more than 100% and if each person is able	19:22
	by sliding scales, or by knowing collective bargaining,	19:27
	or by whatever device, to always stand firm	19:31
	on his claim to the normal GNP	19:38
	and if all these claims add up to more than 100%,	19:41
	then you may find yourself always	19:44
	with 110% of money spending,	19:46
	chasing after 100% of producible goods	19:50
	and then that is a formula for perpetual inflation.	19:52
	I may say, by the way, that sometimes Keynesian economics	19:58
	is called depression economics	20:02
	and it's supposed to be better in time of depression	20:04
	and not so much in season, in time of inflation	20:07
	but the analysis that I've just been giving you	20:11
	is attributable to John Maynard Keynes.	20:14
	In 1939, in a book on how to pay for the war,	20:18
	he gave the present analysis.	20:21
	Now, of course, this process cannot go on indefinitely	20:22
	unless the budget fiscal policy's permissive	20:26
	and unless monetary policy's permissive	20:33
	because if everybody keeps naming administered prices	20:36
	and wages higher and higher	20:42
	but there's no increase, let's say,	20:44
	in the total stock of money,	20:46
	then the velocity of circulation of money	20:48
	must be made to become faster and faster	20:51
	and surely we all know that there's some limits	20:55
	upon this process.	20:58
	Similarly, our fiscal system has built-in stabilizers	21:01
	and so as inflation proceeds we all,	21:07
	because of the graduated progressive character	21:11
	of our income tax system,	21:13
	move into higher and higher brackets and automatically,	21:15
	therefore, this tends to cause the inflationary gap	21:18
	to finally close itself.	21:24
	I do not approve of the program	21:27
	which some economists have put forth	21:30
	to put all of our tax brackets and our exemptions	21:32
	on a real scale so that whenever the cost of living goes up,	21:38
	we automatically reduce the tax bracket	21:44
	of a given money income because if you do so legislate,	21:49
	you lose all of the built-in flexibility	21:55
	which keeps some check upon inflation.	22:00
	And I'm in favor of automatic stablize.	22:03
	We don't have so many that we can afford	22:06
	to get rid of this one but that's another story.	22:09
	Well, first, to comment upon this particular proposal,	22:16
	I do not think that it is so easy to administer	22:23
	as its proponents may think.	22:29
	It's very hard to draw the line between promotions,	22:33
	between changes in grade which qualify	22:37
	for an increase in compensation and those which do not.	22:40
	And you can be sure that in an adversary procedure,	22:45
	you will have to have tribunals,	22:48
	which pass upon these matters.	22:50
	Furthermore, as anyone knows who has studied Guideposts,	22:53
	either in the theoretical formulation or how they work out,	22:58
	there are always certain parts of the country	23:02
	where there are labor shortages.	23:04
	There's always certain new industries	23:06
	where the labor shortage is	23:08
	and it serves a useful function	23:09
	to let that labor market be cleared	23:12
	by having the wage rate rise, rise in the short run,	23:15
	more than elsewhere.	23:19
	That's the method by which traditionally	23:21
	we have had mobility in our labor markets.	23:23
	That's what sucks people into new lines of activities.	23:25
	That's the mechanism by which we speed	23:29
	up the process of adjustment and a constitutional amendment	23:32
	which freezes wages would really be a disaster	23:36
	over a long period of time.	23:41
	Of course, over a period of one or two years,	23:42
	a wage freeze would be a possibility.	23:45
	Now, I've been treating this proposal seriously,	23:47
	as if it deserves a serious consideration	23:50
	but there is a problem of its feasibility.	23:53
	It's all very well for a sizeable fraction	23:56
	of the more prosperous part of the population to say,	23:59
	Let's crack down on the unions	24:01
	but my first reaction in reading the Dale proposal	24:03
	for regulating wages only and not as part	24:07
	of what has historically been the package	24:12
	in American life, in World War II,	24:14
	in the Korean War, when we had wage controls.	24:16
	We also had price controls.	24:19
	And we also had, as part of the political quid-pro-quo,	24:21
	excess profits tax and I think realistically you probably,	24:26
	in forming a judgment as to the merits of wage price,	24:31
	of even wage controls, you ought to consider	24:35
	that it probably feasibly would be necessary	24:38
	to have the complete package	24:40
	and then you may come to a different conclusion.	24:41
	But let's suppose that, for the moment,	24:43
	it were feasible, or in a spirit of hysteria,	24:48
	the American people could be mobilized to favor this.	24:52
	What is one to think?	24:56
	I don't know who it would make happy	24:59
	but I know one group that it certainly would make happy.	25:00
	Economists in Moscow and Peking would be delighted	25:03
	because I really can't think of anything more calculated	25:07
	to exacerbate the class struggle	25:12
	in this country than such a move,	25:16
	which would be regarded by labor	25:20
	as unilaterally picking on it.	25:21
	I think, alas, we're already having a decaying consensus,	25:27
	that our social cohesiveness is being diminished,	25:32
	that, in a sense, our society is falling apart	25:35
	and the conflicts are increasing.	25:39
	This would certainly be calculated, I would guess,	25:44
	to further that process.	25:50
	Sometimes the example is given of Britain.	25:56
	Britain is a horrible example.	25:59
	There, but for the grace of God, I hope will not go we	26:03
	because the trade-off is bad enough,	26:06
	the Phillips curve in the united States is bad enough	26:09
	between unemployment and price stability.	26:11
	But in Britain, the Phillips curve looks almost horizontal.	26:19
	You know, there are people	26:23
	who believe in the Phillips curve,	26:24
	which is negatively inclined.	26:25
	There are people who believe	26:27
	in a natural rate of unemployment,	26:28
	which says in the long run	26:31
	the Phillips curve is a vertical line.	26:32
	In Britain, you have something much worse	26:34
	than either of those two things.	26:36
	You have what seems almost	26:38
	to be a horizontal Phillips curve,	26:39
	that Britain is getting higher and higher rates	26:41
	of unemployment and they are recreating,	26:44
	at higher and higher rates of unemployment,	26:46
	about the same degree of wage cost push	26:48
	and administered price push.	26:52
	Now, it's precisely England which,	26:55
	on more than one occasion,	26:57
	has toyed with these wage pauses.	26:59
	There was in the Tory government,	27:03
	not the present one, an earlier one,	27:06
	Selwyn Lloyd's income pause.	27:08
	There was in the Wilson government	27:12
	as a result of recommendations by Neddy,	27:16
	the National Economic Development Council, I guess it is,	27:19
	which really never amounted to much.	27:24
	There were proposals for this sort.	27:28
	There's very little reason to think from foreign experience	27:31
	that such unilateral measures are going to work	27:35
	in a modern populous mixed economy and democracy.	27:39
	So, I don't expect that the mail is going to stop very soon.	27:46
	I think that we're going to have an intensification	27:51
	of antiunion legislation but I always ask myself	27:53
	about any proposed legislation	27:58
	and I always try this out upon my colleagues,	28:00
	who are experts in the field of labor relations,	28:04
	Will this measure you propose achieve the purpose you want?	28:09
	Will you effectively control wages	28:14
	and make the labor market more efficient,	28:16
	more responsive to surplus and to deficiency?	28:18
	Or will your action, in the short run and the longer run,	28:23
	increase the imperfection of the labor market?	28:29
	Will it lead to more and more labor strike?	28:32
	Will it lead to an intensification of the class struggle?	28:35
	And when you ask yourself those questions,	28:40
	if you are an informed person,	28:41
	you become much less confident	28:43
	about any simple reforms in this field.	28:45
Announcer	Thank you, Professor Samuelson.	28:49
	If you have any questions	28:50
	or comments for Professor Samuelson,	28:52
	address them to Instructional Dynamics, Incorporated,	28:54
	166 East Superior Street,	28:57
	Chicago, Illinois, 60611.	28:59

Item Info

Title:

Tape 68 - Will automatic wage controls work

Date:

circa 1970 to circa 1971

Contributor:

Samuelson, Paul A. (Paul Anthony), 1915-2009

Subject:

Format:

audiocassettes

Language:

English

Digital Collection:

Paul A. Samuelson papers, 1933-2010 and undated

Source Collection:

Paul A. Samuelson papers, 1933-2010

Series:

Economics Cassette Series: Paul Samuelson

Rights:

Limited Re-Use

CC BY-NC 4.0

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This material is made available for research, scholarship, and private study. Copyright in this material has not been transferred to Duke University. For reuses of this material beyond those permitted by fair use or otherwise allowed under the Copyright Act, please see our page on copyright and citations: https://library.duke.edu/rubenstein/research/citations-and-permissions.

Identifier:

RL10082-CS-0068
ref2275_dme
samuelsonpaul
duke:325091
pstau001068
ark:/87924/r4br8mz37
967b46e9-e499-4651-a85b-b42b1bf08304

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Tape 68 - Will automatic wage controls work

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Economists' Papers Archive

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