International Encyclopedia of Public Policy and Administration - Vol. 4

By Jay M. Shafritz | Go to book overview
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WAGE AND PRICE CONTROLS. The fixing and regulating of wages and prices as a matter of government policy in order to create a desired economic or social condition that ostensibly would not have been produced in the absence of government intervention.

In an attempt to circumvent the perceived social and economic maladies that are sometimes associated with certain macroeconomic conditions (e.g., hyperinflation, economic recession or depression, national emergencies, etc.), policymakers have often resorted to the use of wage and price controls. One could argue that throughout history all governments have established and enforced wage and price controls at one time or another. Furthermore, one could argue that these controls did not always have the intended effect. In premodern societies, the inherent difficulties in enforcing broad regulations often necessitated that controls be limited to a single market or sector (e.g., bread). However, in both ancient and contemporary times, these types of controls were almost always detrimental over the long term in that they encouraged individuals to overconsume goods and services that were relatively cheap and find substitutes for those that were made prohibitively expensive. In order to avoid these and other types of social and economic perversions, it is necessary to regulate all wages and prices within an economy, i.e. comprehensive wage and price controls.

The twentieth century produced what is arguably the best, albeit infamous, example of a society regulated by universal wage and price controls. In the Soviet Union ( 1917-1989), official ideology precluded any reliance on market forces to build a modern socialist state. Wages and prices, in conjunction with employment quotas, production targets, rationing, and a host of other social and economic controls, were established by a central planning committee. In order to effectively enforce these controls, the Soviet government assumed a decidedly authoritarian, if not totalitarian, character. Until the 1970s, the Soviet Union demonstrated rapid industrial development, achieving the military status of a superpower. However, the social costs of the brutal enforcement of these controls directly resulted in the imprisonment and/or death of tens of millions of Soviet citizens. From the 1970s until its collapse in 1989, the Soviet Union faced mountain difficulty in establishing effective controls that were responsive to everchanging domestic and international conditions. Although the comprehensive controls created by Soviet centralized planning were not by themselves a sufficient cause for the collapse of the Soviet Union, they were, nevertheless, a necessary cause.

Among Western liberal democracies, the best example of comprehensive wage and price controls can be found during World War II ( 1939-1945). In order to meet the production demands necessary to supply the war effort, temporary wage and price controls were implemented in Great Britain, the United States, and all countries engaged in the war. Before controls, the increase in war production was resulting in rising inflation. Efforts to control prices on selective goods was not having the desired effect. By 1943, consumer prices in the United Sates were rising at an annual rate of almost 12 percent. On April 8, 1943, President Franklin D. Roosevelt ( 1882-1945) issued his Hold-the- Line Order, thus fixing wages and prices at their existing levels from December 1943 to June 1946. During that period, consumer prices rose at an annual rate of 1.6 percent in spite of the fact that production was at an all-time high. However, in order to achieve these impressive results, the government had to create several new regulating institutions, adding an estimated 150,000 bureaucrats. Furthermore, in order to mitigate the detrimental effects of the black market that inevitably evolves whenever demand and supply are not in equilibrium, the government instituted an extensive rationing program. During the war years, sugar, coffee, meat, dairy products, footwear, fuels, and automobile parts were just some of the basic consumable items that had to be rationed at one time or another.

In hindsight, wage and price controls during World War II were generally successful. During the Korean War ( 1950-1954) wages and prices in strategic areas were controlled, but their success is more debatable. At least three factors help account for the relative success of wage and price controls during these two periods. First, they were temporary. Permanent controls would have most likely produced the type of domestic economic and social disruptions that plagued the former Soviet Union during its demise. Second, monetary and fiscal policy were adjusted to work in conjunction with wage and price controls. When, for some exogenous reason, the anticipation of inflation pushes wages and prices out of equilibrium with the money supply, controls can fix wages and prices until consumers' and producers' perceptions of the economy more accurately reflect real economic conditions. Third, patriotism helped produce widespread compliance. During a national crisis, loyal citizens are more willing to bear the hardships that often accompany wage and price controls. In later attempts at wage and price controls in the United States, one or more of these factors were missing, resulting in limited success, if not outright failure.

In August 1971, in response to public concern over inflation, President Richard Nixon ( 1913-1993) announced a comprehensive 90 day freeze of wages and prices. This abrupt announcement was the beginning of several phases of wage and price controls that lasted until April 1974. During this period inflation was fueled by increases in the

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