Statement Announcing Measures To Be Taken Under Phase IV of the Economic Stabilization Program

THE American people now face a profoundly important decision. We have a freeze on prices which is holding back a surge of inflation that would break out if the controls were removed. At the same time, the freeze is holding down production and creating shortages which threaten to get worse and cause still higher prices, as the freeze and controls continue.

In this situation we are offered two extreme kinds of advice.

One suggestion is that we should accept price and wage controls as a permanent feature of the American economy. We are told to forget the idea of regaining a free economy and set about developing the regulations and bureaucracy for a permanent system of controls.

The other suggestion is to make the move for freedom now, abolishing all controls immediately.

While these suggestions are well meant and, in many cases, reflect deep conviction, neither can be accepted. Our wise course today is not to choose one of these extremes, but to seek the best possible reconciliation of our interests in slowing down the rate of inflation on the one hand, and preserving American production and efficiency on the other.

The main elements in the policy we need are these:

First, the control system must be tough. It has to hold back and phase in gradually a large part of the built-in pressure for higher prices which already exists in the economy.

Second, the system must be selective. It must permit relaxation of those restraints which interfere most with production, and it must not waste effort on sectors of the economy where stability of prices exists. The control system should also be designed to accommodate the special problems of various sectors of the economy under the strains of high use of capacity.

Third, the system must contain sufficient assurance of its termination at an appropriate time to preserve incentives for investment and production and guard against tendencies for controls to be perpetuated.

Fourth, the control system must be backed up by firm steps to balance the budget, so that excess demand does not regenerate inflationary pressures which make it difficult either to live with the controls or to live without them.

We have had in 1973 an extraordinary combination of circumstances making for rapid inflation. There was a decline of domestic food supplies. The domestic economy boomed at an exceptional pace, generating powerful demand for goods and services. The boom in other countries and the devaluation of the dollar, while desirable from most points of view, raised the prices of things we export or import.

These forces caused a sharp rise of prices in early 1973. The index of consumer prices rose at an annual rate of about 8 percent from December 1972 to May 1973. The freeze imposed on June 13 put a halt to this rapid rise of prices. But many of the cost increases and demand pressures working to raise prices in the early part of the year had not yet resulted in higher prices by the time the freeze was imposed. Thus a certain built-in pressure for a bulge of price increases awaits the end of the freeze. Moreover, aside from this undigested bulge left over by the freeze, the circumstances causing the sharp price increase in early 1973 will still be present, although not on so long a scale. The demand for goods and services will be rising less rapidly than in the first half of the year. The supply of food will be rising, although not fast enough. Our position in international trade is improving, and this will lend strength to the dollar.

All in all, the tendency for prices to rise in the remainder of 1973, a tendency which will either come out in higher prices or be repressed by controls, will be less than in the first half of the year but greater than anyone would like. Particularly, there is no way, with or without controls, to prevent a substantial rise of food prices. However, by 1974, we should be able to achieve a much more moderate rate of inflation. By that time, the good feed crops in prospect for this year should have produced a much larger supply of food, and total demand should be rising less rapidly than in 1973.

This more satisfactory situation on the inflation front will be reached if three conditions are met:

First, we do not allow the temporary inflationary forces now confronting us to generate a new wage-price spiral which will continue to run after these temporary forces have passed. To do this we must hold down the expression of those forces in prices and wages.

Second, we do not allow the present controls to damp down 1974 production excessively, a problem that is most obvious in the case of meats and poultry.

Third, we do not permit a continuation or revival of excess demand that will generate new inflationary forces. That is why control of the Federal budget is an essential part of the whole effort.

The steps I am announcing or recommending today are designed to create these conditions.

THE PHASE IV CONTROLS PROGRAM

Our decisions about the new control program have been reached after consulting with all sectors of the American society in over 30 meetings and after studying hundreds of written communications. The advice we received was most helpful, and I want to thank all those who provided it.

The Cost of Living Council will describe the Phase IV controls program in detail in statements and regulations.

These will take effect at various times between now and September 12. They will include special regulations dealing with the petroleum industry, published for comment. Here I will only review the general features of the program, to indicate its basic firmness and the efforts that have been made to assure that production continues and shortages are avoided.

The controls will be mandatory. The success of the program, however, will depend upon a high degree of voluntary compliance. We have had that in the past. Study of the reports on business behavior during Phase III shows that voluntary compliance was almost universal. Nevertheless, the rules we are now proposing are stricter, and it is only fair to those who will comply voluntarily to assure that there is compulsion for the others.

Except for foods, the freeze on prices will remain in effect until August 12. However, modifications of the freeze rules will be made to relieve its most serious inequities.

The fundamental pricing rule of Phase IV is that prices are permitted to rise as ranch as costs rise, in dollars per unit of output, without any profit margin on the additional costs. Cost increases will be counted from the end of 1972; cost increases which occurred earlier but had not been reflected in prices may not be passed on. In addition to the cost rule, there remains the previous limitation on profit margins.

Large firms, those with annual sales in excess of $100 million, will be required to notify the Cost of Living Council of intended price increases and may not put them into effect for 30 days. During that period, the Council may deny or suspend the proposed increase.

The wage standards of Phase II and Phase III will remain in force. Notification of wage increases will continue to be required for large employment units.

These are, we recognize, tough rules, in some respects tougher than during Phase II. But the situation is also in many ways more difficult than during Phase II. So long as the system is regarded as temporary, however, we believe that business can continue to prosper, industrial peace can be maintained, and production continue to expand under these rules. Machinery will be established in the Cost of Living Council to consider the need for exceptions from these rules where they may be causing serious injury to the economy. And we will be prepared to consider modification of the rules themselves when that seems necessary or possible.

THE SPECIAL CASE OF FOOD

Nowhere have the dilemmas of price control been clearer than in the case of food. In the early part of this year, rising food prices were the largest part of the inflation problem, statistically and psychologically. If price restraint was needed anywhere, it was needed for food. But since the ceilings were placed on meat prices on March 29, and especially since the freeze was imposed on June 13, food has given the clearest evidence of the harm that controls do to supplies. We have seen baby chicks drowned, pregnant sows and cows, bearing next year's food, slaughtered, and packing plants closed down. This dilemma is no coincidence. It is because food prices were rising most rapidly that the freeze held prices most below their natural level and therefore had the worst effect on supplies.

We must pick our way carefully between a food price policy so rigid as to cut production sharply and to make shortages inevitable within a few months and a food price policy so loose as to give us an unnecessary and intolerable bulge. On this basis we have decided on the following special rules for food:

1. Effective immediately, processors and distributors of food, except beef, may increase their prices, on a cents-per-unit basis, to the extent of the increase of. costs of raw agricultural products since the freeze base period (June 1-8).

2. Beef prices remain under present ceilings.

3. The foregoing special rules expire on September 12, after which time the same rules that apply to other products will apply to foods.

4. Raw agricultural products remain exempt from price control.

To relieve the extreme high prices of feeds, which have an important effect on prices of meat, poultry, eggs, and dairy products, we have placed limitations on the export of soybeans and related products until the new crop comes into the market. These limitations will remain in effect for that period. But permanent control of exports is not the policy of this Government, and we do not intend at this time to broaden the controls beyond those now in force. To a considerable degree, export controls are self-defeating as an anti-inflation measure. Limiting our exports reduces our foreign earnings, depresses the value of the dollar, and increases the cost of things we import, which also enter into the cost of living of the American family. Moreover, limiting our agricultural exports runs counter to our basic policy of building up our agricultural markets abroad. Unless present crop expectations are seriously disappointed, or foreign demands are extremely large, export controls will not be needed. However, reports of export orders for agricultural commodities will continue to be required. Our policy must always be guided by the fundamental importance of maintaining adequate supplies of food at home.

The stability of the American economy in the months and years ahead demands maximum farm output. I call upon the American farmer to produce as much as he can. There have been reports that farmers have been reluctant to raise livestock because they are uncertain whether Government regulations will permit them a fair return on their investment, and perhaps also because they resent the imposition of ceilings on food prices. I hope that these reports are untrue. In the past year real net income per farm increased 14 percent, a truly remarkable rise. I can assure the American farmer that there is no intention of the Government to discriminate against him. The rules we are setting forth today should give the farmer confidence that the Government will not keep him from earning a fair return on his investment in providing food.

The Secretary of Agriculture will be offering more specific advice on increasing food production and will be taking several steps to assist; in particular, he has decided that there will be no Government set-aside of land in 1974 for feed grains, wheat, and cotton.

I am today initiating steps to increase the import of dried skim milk.

When I announced the freeze, I said that special attention would be given, in the post-freeze period, to stabilizing the price of food. That remains a primary objective. But stabilizing the price of food would not be accomplished by low price ceilings and empty shelves, even if the ceilings could be enforced when the shelves are empty. Neither can stabilization be concerned only with a week or a month. The evidence is becoming overwhelming that only if a rise of food prices is permitted now, can we avoid shortages and still higher prices later. I hope that the American people will understand this and not be deluded by the idea that we can produce low-priced food out of acts of Congress or Executive orders. The American people will continue to be well-fed, at prices which are reasonable relative to their incomes. But they cannot now escape a period in which food prices are higher relative to incomes than we have been accustomed to.

THE PROCESS OF DECONTROL

There is no need for me to reiterate my desire to end controls and return to the free market. I believe that a large proportion of the American people, when faced with a rounded picture of the options, share that desire. Our experience with the freeze has dramatized 'the essential difficulties of a controlled system--its interference with production, its inequities, its distortions, its evasions, and the obstacles it places in the way of good international relations.

And yet, I must urge a policy of patience. The move to freedom now would most likely turn into a detour, back into a swamp of even more lasting controls. I am impressed by the unanimous recommendation of the leaders of labor and business who constitute the Labor-Management Advisory Committee that the controls should be terminated by the end of 1973. I hope it will be possible to do so, and I will do everything in my power to achieve that goal. However, I do not consider it wise to commit ourselves to a specific date for ending all controls at this time.

We shall have to work our way and feel our way out of controls. That is, we shall have to create conditions in which the controls can be terminated without disrupting the economy, and we shall have to move in successive stages to withdraw the controls in parts of the economy where that can be safely done or Where the controls are most harmful.

To work our way out of controls means basically to eliminate the excessive growth of total demand which pulls prices up faster and faster. The main lesson of that is to control the budget, and I shall return to that critical subject below.

But while we are working our way to that ultimate condition in which controls are no longer useful, we must be alert to identify those parts of the economy that can be safely decontrolled. Removing the controls in those sectors will not only be a step towards efficiency and freedom there, it will also reduce the burden of administration, permit administrative resources to be concentrated where most needed, and provide an incentive for other firms and industries to reach a similar condition.

During Phase II, firms with 60 employees or fewer were exempt from controls. That exemption is now repeated. We are today exempting most regulated public utilities, the lumber industry (where prices are falling), and the price of coal sold under long-term contract. The Cost of Living Council will be studying other sectors for possible decontrol. It will also receive applications from firms or industries that can give assurance of reasonably noninflationary behavior without controls. In all cases, of course, the Cost of Living Council will retain authority to reimpose controls.

BALANCING THE BUDGET

The key to success of our anti-inflation effort is the budget. If Federal spending soars and the deficit mounts, the control system will not be able to resist the pressure of demand. The most common cause of the breakdown of control systems has been failure to keep fiscal and monetary policy under restraint. We must not let that happen to us.

I am assured that the Federal Reserve will cooperate in the anti-inflation effort by slowing down the expansion of money and credit. But monetary policy should not, and cannot, be expected to exercise the needed restraint alone. A further contribution from the budget is needed.

I propose that we should now take a balanced budget as our goal for the present fiscal year. In the past I have suggested as a standard for the Federal budget that expenditures should not exceed the revenues that would be collected at full employment. We are meeting that standard. But in today's circumstances, that is only a minimum standard of fiscal prudence. When inflationary pressure is strong, when we are forced to emergency controls to resist that pressure, when confidence in our management of our fiscal affairs is low, at home and abroad, we cannot afford to live by that minimum standard. We must take as our goal the more ambitious one of balancing the actual budget.

Achieving that goal will be difficult, more difficult than it seems at first. My original expenditure budget for fiscal 1974 was $268.7 billion. Since that budget was submitted, economic expansion, inflation, and other factors have raised the estimated revenues to about the level of the original expenditure estimate. However, while that was happening the probable expenditures have also been rising as a result of higher interest rates, new legislation enacted, failure of Congress to act on some of my recommendations, and Congressional action already far advanced but not completed.

It is clear that several billion dollars will have to be cut from the expenditures that are already probable if we are to balance the budget. That will be hard, because my original budget was tight. However, I regard it as essential and pledge myself to work for it.

We should remember that a little over a year ago I set as a goal for fiscal year 1973 to hold expenditures within a total of $250 billion. There was much skepticism about that at the time and suggestions that the number was for political consumption only, to be forgotten after the election. But I meant it, the people endorsed it, and the Congress cooperated. I am able to report today that the goal was achieved, and total expenditures for fiscal year 1973 were below $249 billion.

I will take those steps that I can take administratively to reach the goal of a balanced budget for fiscal year 1974. I shall start by ordering that the number of Federal civilian personnel at the end of fiscal year 1974 total below the number now budgeted. The Office of Management and Budget will work with the agencies on this and other reductions. I urge the Congress to assist in this effort. Without its cooperation, achievement of the goal cannot be realistically expected.

Despite the difficult conditions and choices we now confront, the American economy is strong. Total production is about 6 1/2 percent above a year ago, employment has risen by 3 million, real incomes are higher than ever. There is every prospect for further increases of output, employment, and incomes. Even in the field of inflation our performance is better than in most of the world. So we should not despair of our plight. But we have problems, and they are serious in part because we and the rest of the world expect the highest performance from the American economy. We can do better. And we will, with mutual understanding and the support of the American people.