On the Agenda? Wage-Price Controls

On the Agenda? Wagae-Price Controls

The most important thing the Fed is doing is not targeting the federal funds rate at zero (or zero to .25%–whatever this range can possibly mean). That’s because the federal funds rate has been virtually zero for about a month, even though the target was 1%. (See a recent comment I made explaining what the federal funds rate is, if this is unclear.) Instead, what is really significant is that the Fed intends to buy, according to the Times, "large quantities" of "mortgage-related bonds, longer-term Treasury bonds, corporate debt and even consumer loans." Now, this is spectacularly new.

When you add to this "new monetary policy," or whatever you call it, the $600 billion to $1 trillion stimulus planned by Obama, (alas) over 2 years, and not one, the chances are that the economy will stop dropping either by the fall of 2009, being optimistic, or hopefully by the summer of 2010. This reversal will happen sooner if a huge part of the Obama stimulus goes to aid states and cities. By a huge part, I mean at least $300 billion. The effect of this spending will be almost immediate, and I suspect will also be considered as worthy and credible–on schools, libraries, and the like–whereas all the variations of the infrastructure stimuli I read of may take a considerable period of time to get off the ground, worthy though they may be.

But Alan Blinder, a Princeton Professor of Economics, and formerly, Vice-Chairman of the Federal Reserve, and a liberal, is worried about the inflationary potential of what is being done, or proposed, not what will happen in 2009, but what will happen after a recovery picks up steam, if we can be optimistic, in, say, 2010. Blinder is right to be concerned, since the Fed, it looks like, is going to be printing money by the trillions.

In a recent comment, I wrote that at some point the Fed will reverse itself, when the inflation begins, and that the longer-run period ahead of us will contain high interest rates to contain this inflation and therefore cause the economy to be sluggish. This means the normal state of the economy will have higher rates of unemployment than what we are accustomed to, even during relatively good times.

However, there is an improbable answer to this, a "solution" to inflation used in the early 1970's, one which seemingly is forever discredited, opposed by almost all in the political spectrum, with vows made at the time that this so-called solution never be used again. I am of course referring to the system of wage and price controls thrust on us by Nixon in August, 1971 (the 15th if I remember correctly) and which went through a number of phases until 1974.

Nixon wanted to keep low for political purposes what I believe could be considered a relatively minor amount of inflation. What happened is that the Fed chief, Arthur F. Burns, Nixon’s appointee, caved in to Nixon, and kept the 1969-70 recession relatively short–see my earlier comment on Federal Reserve heads. By keeping the recession short, by lowering interest rates–at that point traditional monetary policy worked, unlike now--the inflation of the 1960's, partly caused by the Vietnam War, was only partially reduced. The politics of this is that Nixon didn’t want to go into the 1972 election with a large amount of unemployment (he didn’t know, in 1971, his opponent would be a patsy–George McGovern), but he also worried that inflation might also do him in, so he began a wage-price freeze which phased into a system of wage-price controls.

But in 2010 or 2011, if the choice is: (a) high unemployment to keep prices down, given the trillions being printed, and the trillion of stimuli, along with the expected deterioration of the dollar, leading to higher costs for everything being imported, or (b) a system of price controls, for, say, a 5 year period, to borrow a number from our former (?) arch-enemies (a system that also may require controls on wages), I have hopes the phony-baloney Nixon program of 1971-1974 should not nix this solution, in 2010-2015.

And there is, of course, a successful precedent–World War II. Wage-price controls worked then, and worked well, and were not unpopular, since their need was readily understood. With some prepping–public discussion and leadership--the need for something like this could possibly be accepted. And if accepted, succeed. If not, the alternative seems to me far more dismal–high rates of unemployment, kept high by high rates of interest, designed to keep the rate of inflation caused by the unprecedented bail-out to reasonably low levels.

Blinder is right to be concerned. As we get closer to the period he is concerned about–yet a few years away, unless the various stimuli work far better than anyone anticipates–let’s hope leaders of his caliber talk about a solution of the type I am suggesting.