Business review; Wage price guideposts

From the national educational radio network here is a Business Review ASSOCIATE PROFESSOR ROSS Wilhelm of the University of Michigan Graduate School of Business Administration presents is views and comments of business and economic activity. Recently President Johnson's Cabinet Committee on price stability recommended that the wage price guidepost be restored as a means of combating inflation. The Wage Price guidepost you remember were used by presidents Kennedy and Johnson from one thousand nine hundred sixty two to one thousand sixty six as a means for applying public pressure to hold prices in line and to keep wage increases in line with the rate at which national productivity was increasing a three and a half percent per year from one thousand sixty five onwards under the wage price guideposts excessive wage increases went unchallenged by the administration while large firms were berated and chastised if they increased their prices. The Wage Price guidepost were a bad joke because the inflation that caused the wage price increases was the result of the inappropriate monetary and fiscal policies of the very administration that was trying to shift the blame on to labor and

management. The death knell for the wage price guidepost was sounded in August 1966 when the settlement of the airline mechanics strike included wage increases which were widely interpreted as meant as a major departure from the guidepost. And simultaneously price increases on steel sheet and strip were allowed to go unchallenged. All of the experience with the wage price guide posts indicate that there are not an effective means for combating inflation and further that they can seriously harm the economy. Inflation is a problem that's caused by the government mismanagement of its monetary and fiscal policies. There's been no inflation in our history that has not been caused by such mismanagement. The only cure for inflation is to reduce the expansion of the money supply in the economy. The most important weakness of such superficial devices as wage brakes guideposts is that they divert attention away from the true cause of the inflation and implicitly shift efforts toward symptoms and not the cause. Of equal importance is the fact that wage price guidepost distort the

economy in undesirable ways. As Professor Charles Davison and I demonstrate in our monograph on the economic effects of the wage price guide post. Such effects ignore the demand aspect of pricing and this can result in excessive quantities of some goods being produced. Well inadequate quantities of other goods are produced. In addition distortions also arise because it's not possible to apply the guidepost to all sectors of the economy. For instance it's not possible to apply them to products sold in freely competitive markets such as agricultural products. Nor is it possible to apply the guideposts of the action of small unions or small firms. And further they do not apply to imported goods nor were they ever applied to the actions of government itself in terms of increases in military and civil servant salaries and even to increases in the minimum wage. And lastly the wage guideposts were never applied to. It services such as hospital services or medical care. And yet this has been and is today

the very area where prices have been increasing most rapidly. The damnation of the Wage Price guidepost does not end with these considerations however. They also have the inherent weakness that they're easily circumvented and result in hidden price and wage increases. The price of a product is only one of the factors that determines the total cost of the product for the buyer. Total costs include the terms of sale various discounts allowed the cost of transportation the cost of before and after sales service. The quality of the product as well as a multitude of other factors. The guides were and really can only be concerned with price changes as a consequence we saw many firms increase the total cost to their buyers by altering the non price cost factors while allowing the prices to remain constant. On a similar basis the total labor costs of a firm can be increased through changes in fringe benefits even though wages remain constant. The simple fact is that to effectively prevent total costs from rising it would

involve an administrative nightmare and probably could not be achieved with anything less than a police state and anything short of this makes a hollow mockery of the guideposts the Nixon administration will be well advised to allow the wage price guidepost to rest in peace. If Mr Nixon wants to clean up the inflationary mess and to restore the economy to the stables to sustainable growth he will do best to cure the basic causes of the inflation and to ignore the symptom that was Associate Professor Ross Wilhelm of the University of Michigan Graduate School of Business Administration. With his views and comments on business and economic activity Business Review is recorded by the University of Michigan Broadcasting Service. This is the national educational radio network.