Dilemmas of Price Control

September 11, 1950

Before passing the economic controls act, Congress got into a last-minute snarl over whether it should insist on “across-the-board” price- and wage-fixing, or permit “selective” price-fixing. The truth is simply that there are dilemmas in either course.

“An overall ceiling across the entire economy” is the Baruch proposal. Its purpose is to insure that “prices, wages, rents, fees, and so on” will be controlled in an impartial, non-discriminatory, nonpolitical manner. Baruch thinks he would insure this by recommending that all prices and wages be “rolled back” to and frozen as of June 25, the day hostilities broke out.

But the proposal has fatal defects. It ignores the whole function that free prices, free wages, and free markets play in our economy. That function is to direct production into the goods that are most needed and away from the goods that are least needed. Free prices provide a wonderfully flexible but inextricably interrelated system of incentives and deterrents, which constantly balance and synchronize production as among thousands of different commodities. The free price system provides a voluntary and “automatic” allocation of capital and labor.

The Baruch plan would try to freeze for wartime the price relationships that were adapted to a past situation in peacetime. It would prevent the very adjustments necessary to get the immediate, voluntary changes in the structure of production that war requires. It would force the government into compulsory rationing of materials and labor—into allocation problems of bewildering and unmanageable complexity. It would drive us straight back to the absurdities of the last war, when OPA was controlling the price of oyster shells and Cadillacs, mink coats and paper clips. The Baruch plan would strait-jacket production. It would dangerously retard, not advance, the prosecution of the war.

And it would not even, in the end, have the one merit of being politically nondiscriminatory. Labor would not tolerate the compulsions involved. Demands would come from every side for the correction of “hardships” and “inequities.” Many of these demands would have undeniable merit. But once the door was opened every powerful pressure group’s demands would be granted under the euphemism of “correcting inequities.”

It must be pointed out once more that if credit control were tight enough, there would be no need for blanket price and wage control, because the general level of prices would not rise. The relationships of individual prices and wages to each other would change, of course, as they should. On the other hand, if money and credit are substantially expanded, blanket price controls are worse than futile. In the end they break down, but they constrict production in the meantime.

If we try to avoid the evils of blanket price control by “selective” price control we merely create other evils. Selective price control becomes political and discriminatory almost at once. It becomes an excuse for holding down prices while permitting or encouraging wages to rise. And in the long run the price of a finished commodity can be held down only by controlling also the price of the raw materials and labor that go into it, the prices of substitute products, and so on. Selective price control, once inaugurated, tends to spread in ever-widening circles toward blanket price control.

But suppose the price of a particular product starts to soar above the level thought necessary to insure the required production of that product? This is the most plausible case for selective price control. Even here a better solution would probably be a heavy excise tax on that product. Such taxes could be either a flat percentage of the whole price of the product, or, say, 75 percent of the amount by which the price exceeds that considered necessary to bring out sufficient production of that product. Congress, in wartime only, could delegate to the Administration discretion to levy such flexible taxes. These taxes would discourage wasteful consumption, reduce war profits, and increase revenues to the government.