The Wage Price Freeze

Bold action against free enterprise

President Nixon's executive order providing for stabilization of prices, rents and wages is an act of supreme defiance against the free market and the freedom of Americans. Nixon's action was born of desperation, in the face of extreme pressure both domestically and internationally. His game plan to reduce inflation and end the recession was not on target, and Nixon was faced with rising unemployment together with rising prices in a dramatic practical refutation of the monetary and fiscal economic policies he sought to implement.

WHY PUBLIC SUPPORT?

The imposition of a wage-price freeze is of profound economic significance. Since most people are illiterate in economics, one might expect them to behave cautiously before endorsing economic policies. However, the manifestation of strong popular support for Nixon's New Economic Program and the previous clamor for imposition of wage-price controls illustrates the accuracy of Schumpeter's insight: "The typical citizen drops down to a lower level of mental performance as soon as he enters the political field. He argues and analyzes in a way which he would readily recognize as infantile within the sphere of his real interests. He becomes a primitive again. His thinking becomes associative and affective." Thus the typical citizen "in political matters tend[s] to yield to extra-rational or irrational prejudice and impulse." CAPITALISM, SOCIALISM AND DEMOCRACY 262 (3d ed. 1950)

The public demand for wage-price controls is comparable to the pressure for rent control laws in New York City. Economists have demonstrated why rent control laws are counterproductive and tend to diminish the housing supply, thus intensifying the problem of scarce housing. The experience in New York City after some twenty-five years of postwar rent controls attests to this truth.

From a utilitarian standpoint, wage-price controls, just as rent control laws, cannot work. Their imposition leads to inequities and black markets. When a freeze is lifted and adjustments are allowed to be made under governmental scrutiny (Phase 2), the consequences are bureaucratic expansion and the substitution of political judgments for those of private businessmen. As Professor Rothbard has observed, "trying to check inflation through price controls is akin to combatting a patient's fever by manually pushing down the mercury level in the thermometer."

Who is best suited to decide whether prices or wages should be changed, and to what extent? The price system allows a multitude of adjustments in reaction to changes in supply and demand, resulting in optimum satisfaction of consumer wants. Occasions constantly arise necessitating such adjustments. Shackled by a wage freeze, what is an employer to do if he wants to retain the services of a valuable employee who receives a higher wage offer from a competitor? What is a company to do if it is faced with a price increase in the cost of components which it imports from countries not subject to the price freeze?

What is involved in the support of Nixon's new economic policy is an application of the American political style towards problem solving: "DON'T JUST SIT THERE. DO SOMETHING!" Edward C. Banfield characterizes this rule as follows: "Believing that any problem can be solved if only we try hard enough, we do not hesitate to attempt what we do not have the least idea of how to do and what, in some instances, reason and experience both tell us cannot be done." THE UNHEAVENLY CITY 249-50 (1970).

In the application of this "wishful thinking" approach to public policy, Americans of all political complexions are supporting the President in his wage-price freeze. They do so because Nixon has done something bold, without regard to whether the action will help or aggravate the problem. Thus, Nixon is now riding a crest of popularity such as he has not previously enjoyed.

REAL SOURCE OF INFLATION

One might wonder what the public reaction would have been had Nixon on August 15 delivered an announcement calling for bold action to fight inflation—with a specific program for outlawing the Democratic Party for ninety days, with a Phase 2 to follow as deemed necessary. Would the public fall in line so quickly if Nixon embarked on such a bold approach? Perhaps Nixon's freeze is not so obviously unrelated to alleviating inflation as outlawing the Democratic Party would be—but economists who comprehend the real cause of inflation know that wage-price controls are no more effective as a cure. The real source of inflation is the government itself, with its control over money. Inflation results from monetary expansion, pursued by the Federal Reserve Board in issuing new, unbacked dollars into the economy. Professor Sennholz' article in this issue explains the inflationary effects of such "fiat" money. As Mises has stated, "Inflation is the fiscal complement of statism and arbitrary government…a cog in the complex of policies and institutions which gradually lead towards totalitarianism." THEORY OF MONEY AND CREDIT 428 (1953)

Those who value freedom should recognize the totalitarian implications of Nixon's New Economic Program. In a recent attack on Galbraith's advocacy of wage-price controls, Paul McCracken, chairman of the Council of Economic Advisers, wrote that "General price and wage control would be a serious threat to individual freedom. It is amazing that the press, so jealous of its own freedom, does not recognize the implications of having literally everyone in the country controlled by a government agency." LOS ANGELES TIMES August 8, 1971. Standard economic and history texts point out the use in Nazi Germany of wage and price controls to implement the fascist economic policy of national socialism. In contrast to the Russian Marxist doctrine of government ownership of the means of production, the fascist approach was to allow the means of production to remain nominally under private ownership-while the government directed businessmen as to what they could produce, and at what price. As described in Neumann's text, EUROPEAN AND COMPARATIVE GOVERNMENT (1951), "The outward forms of private property and capitalism were preserved, but they were mere trappings behind which abode the naked and unrestrained control of the state.…" (p. 371) In this light, Nixon's New Economic Policy may accurately be described as incorporating a fundamental tenet of the fascist economic program.

The public silence—or worse the cheers—since Nixon's executive order was announced is appalling. Where were the voices of the politicians who profess a belief in the free enterprise system? Is it that they ran out of steam and had nothing left to respond after their hard fight for government aid to Lockheed and for development of the SST? How is it, for example, that such a self-professed supporter of the free market as Ronald Reagan can endorse Nixon's new economic policy?

UNCONSTITUTIONAL DELEGATION

There is a grave legal question presented by Nixon's action which should also be voiced. The broad delegation of power by the Congress to President Nixon under the Economic Stabilization Act is subject to constitutional attack. While it is true that, since the New Deal, no act of Congress has been declared unconstitutional on the ground of improper delegation of authority, the constitutional maxim against delegation of legislative power should not be regarded as a dead letter. The Economic Stabilization Act gives the President virtually unlimited legislative authority over the national economy. In fact, no such broad delegation has been sustained except during wartime. Thus, the upholding of the broad delegation of legislative power in the Emergency Price Control Act of 1942 was sustainable under the war power. But it would hardly appear that the war power is available to sustain Nixon's executive order. From a constitutional standpoint, strict constructionists should find little to approve in the broad peacetime delegation of authority set forth in the Economic Stabilization Act.

Given the severity of the economic crises with which the government had set upon itself, what was the government to do? To listen to the administration spokesmen, the government had no choice but to impose a wage-price freeze. To listen to the opposition, the President should have done so sooner and probably should have frozen interest rates and profits as well.

Are we now to believe the government that our cooperation and sacrifice—our humble submission to the directives of the Cost of Living Council with its political interpretations of the executive order—will lead us out of the inflationary/recessionary crisis we are in? The government's credibility on other matters of public policy leaves little reason to believe the government on this issue.

POSITIVE PROGRAM TO HALT INFLATION

What could the government have done to correct the financial crisis? Rather than imposing controls to attack the symptoms of his own inflationary policies, Nixon can get rid of inflation by imposing restraints on monetary expansion. The following program should be implemented if Nixon is genuinely interested in getting rid of inflation: 1. Freeze the money supply, which is increasing at an approximate rate of 12% per year. 2. Permanently halt government manipulation of money by returning to the gold standard and halting the issuance of fiat money. 3. Eliminate deficit spending, by such measures as total withdrawal of American troops from Europe and Asia, elimination of farm subsidies and general curtailment of present and proposed expenditures. (The largest peacetime federal deficit in United States history has developed under Nixon's Republican regime.) 4. Repeal labor laws which give monopoly privileges to unions. 5. Suspend the Davis-Bacon Act, to reduce construction costs. (Nixon previously suspended Davis-Bacon for awhile, but caved in to union pressure and lifted the suspension, thus requiring payment of above-market wages for much government construction.)

What should the people do in the face of the wage-price freeze? The people should indicate their resistance in every proper way. President Nixon should be marked as a one-term President—he must be dumped if he does not withdraw as a candidate in the 1972 elections. The development of broad public opposition to the wage-price freeze is essential. Otherwise, as reported by the WALL STREET JOURNAL in a September 2, 1971 front page story, "The wage-price thaw might be years away…Phase 2 may be forever."