The Case against Wage and Price Control

Mr. Nixon’s recent economic proposals essentially repudiate his earlier faith in free trade and free markets. Concern over a general upward trend of wages and prices is one thing, a strait-jacket on relative price and wage changes is quite another. There is no reason to believe that the existing relationships among myriad prices and wages are the most efficient or most equitable possible— even right now, much less after three months of change. Exemption of taxes and interest rates from the “freeze” leaves our frozen incomes vulnerable to the two fastest rising elements in the typical family budget.

So-called “direct” price controls are no such thing: They are a deceptive attack on the results of monetary mismanagement, rather than on the cause. The current suppression of price increases should cause few short-run problems, since the price index has been rising insignificantly (0.2 per cent last month). The impact of the enormous May increase in the money supply, however, may well hit about the same time the freeze is due to be lifted. Add this monetary snowball to three months of postponed labor demands, and we can be sure of a November explosion of wages, prices and strikes (as occurred in Britain after controls were lifted in late 1969). This situation will create a myopic clamor for still more controls, though controls were largely the cause of the wage explosion. Frozen wages and prices prevent the smooth, continual adjustments which free markets would otherwise make in response to government’s inept management of debt and money.

About the Author

Alan Reynolds

Alan Reynolds, National Review’s economics editor from 1972 to 1976, is a senior fellow at the Cato Institute and the author of Income and Wealth.

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Mr. Nixon’s recent economic proposals essentially repudiate his earlier faith in free trade and free markets. Concern over a general upward trend of wages and prices is one thing, a strait-jacket on relative price and wage changes is quite another. There is no reason to believe that the existing relationships among myriad prices and wages are the most efficient or most equitable possible— even right now, much less after three months of change. Exemption of taxes and interest rates from the “freeze” leaves our frozen incomes vulnerable to the two fastest rising elements in the typical family budget.

So-called “direct” price controls are no such thing: They are a deceptive attack on the results of monetary mismanagement, rather than on the cause. The current suppression of price increases should cause few short-run problems, since the price index has been rising insignificantly (0.2 per cent last month). The impact of the enormous May increase in the money supply, however, may well hit about the same time the freeze is due to be lifted. Add this monetary snowball to three months of postponed labor demands, and we can be sure of a November explosion of wages, prices and strikes (as occurred in Britain after controls were lifted in late 1969). This situation will create a myopic clamor for still more controls, though controls were largely the cause of the wage explosion. Frozen wages and prices prevent the smooth, continual adjustments which free markets would otherwise make in response to government’s inept management of debt and money.