Conversation 051-013

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This meeting and this morning will be a subject that is not really called out directly.

Certainly not the secretary of state, but the defense department is involved because of the money it spends.

And nevertheless, we'd like to go into the matter of

It's been discussed by a hundred and several members of the cabinet, both on our catch page and on the policy and various other forums.

The problem of construction costs.

You've been reading lots of stories about this.

We're all concerned about this.

Today you remember.

We've been hanging about this for several months.

I'd like to turn the meeting over to John Herold.

Where's John?

John, sit down.

and the rain will be of help to all of us.

This will be O'Hannon's praise to several of you who have been here on this movie, John Williams, George Romney, and others, because you have been very familiar with this movie.

I think as well as we all have, the knowledge must

I'll see what he gets in it.

He's got it already.

He gives it to us every time we meet.

Anyway, the important thing is that, uh,

The first is a nature of a report of a subcommittee of the

The cabinet has been deliberating on this subject through Dr. McCracken, who is acting as the staff representative of that group.

Secondly, a presentation by Secretary Monson as to one possible alternative solution to an aspect of the problem.

And finally, a period available for open discussion.

So if I may, I'd like to call on Dr. McCracken to make the initial presentation.

Mr. President and members of the cabinet, I want to take a few minutes at the outset of the hour here to try to lay out the problem here in a somewhat broader setting.

He's looking at this general problem of the banks that used to struggle against employment.

It is, I think, an important point to bear in mind that we have made some progress.

One thing that's quite clear in this chart here is that, by the way, this chart shows the annual rate of increase in price levels, and it's measured by the consumer price index and by the industrial wholesale price index.

And it shows that the annual rate has increased by half-year periods of $2,065,000.

And you can see that generally what we had through this period was a period of accelerations in the rate of inflation.

With the rate of inflation finally moving up with the CPI up to about the 6% range,

It's quite clear from this chart that the acceleration in the rate of inflation, which moves pretty well, pretty kind of, through 66, 60,000, 68.

The acceleration in the rate of inflation came to a halt here in 1969, or perhaps the early part of 1970, at something like the 6% per year rate.

It was about a 4.9% per year rate.

In the second half of last year, and for the first, for this year today, which of course is just only two months, the annual rate in place is 2.8%.

So the acceleration rate is over here.

So I'm going to do the deceleration here.

C-Cell wants to say during the pattern here for industrial wholesale prices.

Not using industrial wholesale prices here because it probably is an indication of, a better indication of the inflationary pressures on the economy.

Once again, this acceleration seems to be taking a long time here and there's been some tendency to decelerate since.

The chair line that I've drawn through the two charts here shows the Amity Daniel Raven from 1953 to 1965 before this thing took off.

And I'd like to make just one quick comment here.

This has, perhaps, a slightly political depth to it.

There is some tendency to assume that the stability of the price level was really continued beginning around 1961.

Actually, the stability of the price level that we saw in the first half of the 1960s was achieved in about the latter part of 1958, and that stability continues from 1958 to about 1965.

Now, I wanted to start off with not to try to paint it as rosy a picture as possible.

I think it is important in dealing with an admittedly vexatious thing for us not to lose sight of the fact that something has been done, but we still have a problem.

And the problem really consists of the fact, it really consists of the fact that there's a very little public attention and concern about this as evidenced by the sub-public opinion poll, which will go upwards of three quarters of the public now, which is the board's way of providing control.

But I think it might be such a substantive way, the most difficult aspect of the problem in place that we have is the problem of trying to work down the rates of increase in compensation per man and hour so that we can achieve a greater degree of stability at a later cost for you and us.

Now here is the record, in this case going back to 1961, the record of the increases in compensation for manpower for the pregnant nun Farley Hunt.

And once again here, irregularities have started to move up and reached, it's been running in the last three years here as well, at about 7%.

and the labor cost per unit of output had a double squeeze both by the rise in the rate of increase of compensation for manpower and the fact that productivity was, the rate of increase in productivity was declining and thus we got quite a sharp acceleration in labor cost per unit of output which has been creating some severe pressure underneath the price level to

in the way of unit costs and forcing the price level up.

Incidentally, that squeeze has a particularly severe effect on the price level because unlike in some other periods where a disciplinary policy has been imposed, profit margins were already very low.

In other words, there wasn't the cushion there which could accept the restraint for a period until wage adjustments could be brought into line.

Well, this is these very popular labor data on the median negotiated wage settlement.

These are the figures for increases averaged over the life of the contract, excluding, by the way, whatever the impact of

The cost of living escalators may be so, of course, that 5.6% here will turn out to be too low to the extent that the consumer pricing may be low.

Now the interesting, and of course, here are the first year increases all glorified major collective bargaining agreements.

Menogean, which are significantly higher, reduced the, perhaps the critical thing here to notice is, first of all, that we're not seeing any consequential deceleration here.

Second, if you go back to the

Earlier years, you'll see that the gap between construction and manufacturing here seems to decline.

For example, in 66 and 67, the increase in construction settlements was something like 30% or so higher than in manufacturing.

By the time you get down here, the negotiated increases in construction are well over double.

Now the question generally that the administration faces

has to do with the strategic choices that will be made about any further analysis in the program generally to try to counter this problem, and the possibilities and the combinations that are all on the list.

What I'm trying to do here is to lay out the possibility of further actions in about three broad types of categories.

First of all, a continuation of essentially the present approach of heavy reliance on market improvement actions, of course, in combination with appropriate fiscal and monetary policy, which is

is important in all things.

The second general category would be perhaps essentially the present approach, but pursued more vigorously and into a wider array of areas.

It's in a sense a sort of change of intensity of the pace at which the present

And then third, I wanted to address the programs that were involved.

If you got more overt intervention into the economic process, then really it would almost constitute a change in the direction of policy.

Now, the present approach

is apart from basic fiscal and monetary policy, has really relied heavily on sort of trying planning efforts to move into specific situations or to areas, problem areas,

as it seemed possible to do something.

And this is consistent now with a series of things.

The President, in his address last year, called for the publication of periodic inflation alerts.

This major function would be to try to lift the level of visibility of wage and price adjustments.

Uh, and, uh, thereby I come to quote this public opinion on, uh, we have the National Commission on Productivity, sir, to try to, uh, to do, uh, to do something in the security of productivity.

The Friction Regulations Review Board, which is headed by Ken Weinberger, has been at work as a matter of fact, through one or two actions they've taken already, which have had a significant effect.

Include oil prices, the issue was lost by the island in the instance of a price increase, and according to the terms of the executive order, which called for that,

and that decision, I think, will be announced, definitely will announce the target.

We have, I suppose, the most nearly specific confrontation in the price area in regard to the large proposed price increase for certain steel products, with metal and steel, and the suspension of data stations for recent ones.

But these are all in the direction, one way or another, of trying to test the

by trying to nudge the pre-market adjustment processes along a bit.

The obvious advantages of this kind of an approach are that it is most consistent with the essential pre-market approach,

uh, which is philosophically characterized as the administration's union ideology has had some effect.

Uh, the, uh, the purchasing and regulation review board intervention incident too, uh, the, uh, caused the, excuse me, forced the haulage of mobile homes, I believe it was, rather promptly resulted, I think, in a, in a discernible, uh, effect there.

And certainly in the case of steel increase and so forth.

Now, this approach is an obvious disadvantage.

I won't try to go through all of these, but two are particularly important.

I think it would be generally regarded as not constituting a strong and comprehensive program against inflation.

And of course we have little evidence today that this action, this approach is getting through to the weight aspect of the problem.

Now to the second category, which in a sense is what results in a change of intensity in our efforts rather than any significant dog-legged in the direction of policy.

I'm fairly put here, not a program, but just some illustrations of the kinds of things that might be done if you were to step up the intensity of this effort.

One would be to move toward the deregulation of transportation.

to deal with an area which has been a lot of inflationary, particularly inflationary in the construction area, with such things as legislation in regards to the hiring of all product deployments to initiate regional bargaining and that sort of thing.

There can be a great many other items here, and these are in love with it, or might involve the liberalization of import quotas on steel, oil, and so forth.

in order to try to counter the upper pressure on the crisis.

Incidentally, the statement in regard to the 10% increase in Social Security, calling attention to the high scenario aspects of it, I would put in this category, the interesting thing about that act, that is about the 10% increase,

is not just the physical impact, but the extent to which the 10% starts to spill over as a victim.

One of the guests at the dinner last night is facing away negotiations, and he said his union leader said, well, if Mr. Johnson says 10% is okay, why is it okay for me?

And here another, that's where they start, that's where they start to check themselves.

Now, this setting of the intensity of this has obvious advantages for the industry.

It will result in more visibility.

It might, in some cases, might be able to put the political opposition a little more on the defensive.

Moreover, any of these actions would have long-run benefits to the vitality and effectiveness of the economy.

It's obviously a step up in the intensity of these errors, but that's a disadvantage.

It almost certainly would start to tend to be more confrontational with the businesses and companies.

Some of the new legislation that would be involved would probably not in fact be forthcoming, though it's likely to have the advantage that you put the hot potato in the Congress.

Of course, for the public, the connection between some of these actions, though they are very real, cannot be very evident to public opinion.

I suspect that's true in the case of the suspension of Dave's case.

Now we move on to...

We'll move on to the third category, or a stroke, which would constitute the top of a step-up for escalation in these specific efforts.

So that it really would constitute more of a change of direction.

and the most obvious illustration of this would be the decision of comprehensive weight and price controls, which public opinion, of course, seems to favor at the present time.

In the discussion yesterday, there was some sentiment there, though it turned out to be another possible approach in which

And some of us have looked at it to see whether it has any possibility.

Would be some kind of legislation which would provide legal revenues against the abuses of economic power both in the wage area and in the product area.

involves having a special trade court giving the justice department the authority to bring cases where wage adjustments or price increases were out of line with market conditions and productivity and so forth, or if you're getting an abuse of the exercise of economic policy.

Another possible area of action would be some kind of weight and price review board which has been proposed by a great many people.

Dr. Burns suggested this last December in an address in California.

This weight and price review board could and usually is proposed to exercise moral suites and only the whole piece but by

focusing public opinion on ties and wage decisions, it would help to counter the upward pressure.

But of course, there could be reports given more explicit power.

It could be given, for example, the power to administrate, to administer comprehensive wage and price controls.

Or the

perhaps we would not necessarily bring action to the abuses of economic arts, that would, of course, obviously require legislation.

Now, what are the advantages?

They're obvious, I think.

The advantages of these more, well, more, more severe actions, the first advantage, I suppose, is

And then there is a position to be widely hailed as doing something very vigorous about a claim.

That is due to the public opinion is overwhelmingly in favor of waste and price control.

I suspect the announcement that we were going into that or something like it would be hailed as doing something.

Currently, if we went into something like this,

uh, one could assume that in the near term, price indexes for a period would look better.

Uh, in the war time, there is, uh, there was some evidence that controls tended to stabilize the price indexes better than prices, but, uh, but in any case, the price indexes have done it because of, uh, problems with downgrading quality and that sort of thing that are hard to catch.

Um,

If possible, and if handled correctly, it might be possible to handle it tactically so that the Congress would be at least involved more in the action.

Now, the disadvantages here are also, I think, fairly clear.

The Wayne Price Board

and ministering largely moral sway in here.

The international experience with this, I think it would have to be said that at least on the wage side, there's not much evidence that they've really been very effective.

The latest experience is a Canadian experience.

And after a year, with an explicit guideline of 6%, with an unemployment level, a rate that has been a little higher than ours,

by the last year, close to 1% of employment.

The wage performance in Canada was actually worse than that.

The problem, there are other problems here, but although they vary depending on which one we're talking about, any kind of test of strength, as if, for example, if the right board got involved in some

specific situation and seem to be losing.

There is, of course, to be real pregnant now in the administration.

All right, well now, what are you going to do?

Are you going to invoke comprehensive controls?

It's always not being true.

Sometimes you either have to back down or go ahead further than you want.

Secondly, we'd have to remember the halfway actions in this area.

This may suggest an opportunity to step a little on in further steps.

If we can't induce price and wage increases, we're already out of the wire.

Before the second two falls, for example, this had for us to take in a situation of lows, which is kind of disappointing.

that we would first move to this side.

Any action?