The last federal bureaucrat recently vacated a pinkish brown, glass-box office building at 2000 M Street, Northwest, in Washington, D.C., leaving the premises to the remodeler’s work. Although nestled anonymously among its neighbors in the city’s new west end, this building was the headquarters for a unique, decade-long attempt at federal economic regulation. It is not likely the building will ever be listed in the National Register of Historic Places. A hundred years hence Washington’s springtime tourists will not stand in hushed awe in the meeting room of the Pay Board or marvel at the computer center from which the petroleum allocation program was managed during the Arab oil boycott of 1974. The decisions of the various offices of exceptions and appeals will not be printed on insect- and time-defying paper and bound in sturdy red buckram. The names of the generals in America’s first peacetime economic stabilization and resource allocation program are not likely to be remembered, except by those who were directly affected by their decisions.
Yet what went on at 2000 M Street between 1971 and 1981 was important. The activities this building housed—1971 Wage-Price Freeze; Cost of Living Council Phases I, II, III, and IV; the petroleum allocation and pricing programs of the Federal Energy Administration; and the Economic Regulatory Administration of the Department of Energy—all had a lasting impact upon American economic conditions and public administration. In many respects, what happened to the credibility of the federal government in the narrow dimly-lit halls of this nondescript Washington office building was just as disastrous as what happened in the tepid rice paddies and turbulent cities of South Vietnam.
America’s first experience with peacetime economic controls began in August 1971 with all the idealism and enthusiasm appropriate to any new campaign. President Richard Nixon decided to freeze wages, prices, and rents for 90 days. He also took certain other steps, which included an import surtax, to stem a persistent Vietnam-instigated inflation. Although the rate of inflation in mid 1971 was moderate when compared with that in the later 1970’s (only 4—5 percent on an annual basis as compared with 12—13 percent), it was already perceived by government officials and the public alike as being dangerously high when placed in the context of historic American experience.
Because of the Nixon administration’s conservative, anti-big government bias (and President Nixon’s personally unhappy involvement with the wage- and price-control program of World War II as a junior official in the Office of Price Administration), the president initially opted for a simple, low-cost, self-enforcing, and easily disposable approach to economic controls. The basic design of the freeze was to fix the cost of every economic transaction in place and then rely on public pressure, arising from the general knowledge of what constituted acceptable economic behavior, to insure compliance. This approach worked very well. Public support was incredible. There was an almost naïve charm to the letters and calls from members of the business community asking not for relief from the freeze but for instructions on how to bring their operations into conformity with the regulations.
Under the policy direction of the Cost of Living Council, the freeze was administered by the Office of Emergency Preparedness, a small agency which normally dealt with the civil side of national security planning and with disaster assistance. The small OEP staff (a total slightly in excess of 300 employees) was augmented to four times its normal size with personnel detailed from other federal agencies and by the hiring of temporary employees. At the end of the freeze, OEP resumed its traditional role, and economic control operations were transferred to two newly created agencies, the Pay Board and the Price Commission for Phase II.
The freeze was held in place with remarkable firmness. Aside from a limited number of general adjustments that were accomplished through the explanation or interpretation of regulations, very little relief from the rigidity of existing price and wage levels was granted. Only six exceptions or exemptions, all of them very minor in terms of impact, were granted in individual cases during the entire 90-day freeze period. The freeze achieved its goal. The inflation rate had fallen a little more than 2 percent on an annual basis by its end in late November 1971.
Phase II quickly lost the luster of its Phase I predecessor. The successor program, which was only slightly more flexible than the freeze, offered more sophisticated controls, with sanctions, aimed at the longer haul. Phase II was replete with formal regulations, appeals procedures, and a growing bureaucracy. In its time, Phase II worked moderately well. Inflation rates stabilized at 2—3 percent and held following an expected surge which took place just as the freeze ended. Alas, Phase II was not allowed to continue long enough to permit the kind of long-term change in public expectations that would have permanently stemmed inflation; and even while it existed, there were steady pressures on the program which diminished its effectiveness.
Although inflationary pressures could be effectively frozen for 90 days, the dynamics of the American economy mandated a move away from the absolute strictures of the freeze after Phase I. In Phase II only the largest firms were continuously monitored (with spot checks on smaller firms). This limited monitoring and enforcement activity led to considerable fringe evasion of legal price and wage levels. Over time, the cost of imports, particularly the cost of imported oil (although increases in the early seventies were modest compared with those later experienced) brought external pressures to bear on the control system. Finally, the fact the freeze had happened at all had an ironic tendency to erode Phase II. Remembering discomfort experienced during the 90 days, business and labor worked to obtain maximum price levels during Phase II to insure themselves of a good “base period” experience on which to premise their prices should a freeze be reimposed. Certain pressures of a directly political nature also contributed to the attrition of Phase II controls. Large corporations, their officers, and political committees, clearly hopeful of relief from price constraints early in a new Nixon term, made record contributions to the president’s 1972 campaign fund. While there was no ostensibly direct relationship between this support and future decontrol, the enforceable Phase II program did, in fact, meet its demise shortly after the votes were counted, and primary relief was extended to some of the country’s largest corporations with large contributor relationships.
In early January 1973, Phase II wage-price controls were terminated, to be replaced by Phase III and, finally, Phase IV. These programs became little more than monitoring efforts with a near total lack of enforcement of any standards. While these phases of the control program may have placed some limitation on inflationary pressures by threatening the public exposure of selected price- and wage-control violations, their effectiveness was questionable at best. The public had grown cynical about controls, and the level of opprobrium attached to exposure of a violation thus was no longer high, as had been the case during the freeze. There was also a growing public acceptance of an inflationary level higher than that Americans had traditionally experienced.
The damage to the public’s faith in the federal government, caused by the government’s call to battle in the freeze and Phase II followed hard on by its relaxation of controls when it was obvious that the goal of long-term price stability had not been met, is difficult to measure. That there was a serious depletion of public trust became manifest as the purely inflation-oriented controls of Phase IV gave way to the inflation and energy supply allocation controls precipitated by the petroleum shortage of late 1973.
The third Arab-Israeli war resulted in a boycott by Arab petroleum-producing countries of petroleum sales to countries supporting Israel. After the war, when sales were resumed, the Organization of Petroleum Exporting Countries (OPEC), acting at the urging of the Arab members who had caused the boycott, permanently and dramatically raised prices for crude oil and finished products such as heating oil and gasoline. This action resulted in an initial increase in cost of five to six times pre-embargo prices to $20—25 per barrel, depending upon location and quality (generally, the nearer to market and the lighter and purer the crude the higher the price.)
Although the United States was less dependent on imported oil than Western Europe or Japan, its level of reliance on overseas petroleum had grown to the point where about one third of its daily requirements came from OPEC. The embargo created acute problems of access to petroleum energy and petrochemical feedstock resources that first led to allocation regulations to control consumer supplies, and, almost simultaneously, to price regulations to dampen the impact of the sharp petroleum price increases in an energy-extravagant economy.
The mandatory petroleum-allocation and price-control programs were put into place in early 1974, just as Phase IV, the final term of economic stabilization regulation ended. Because of federal civil service personnel procedures and for simple administrative convenience, the new program provided the slowly dissolving staffs of the old stabilization agencies with opportunities for continued employment. Most of these employees had little or no knowledge of the oil industry they were now attempting to regulate, and this, coupled with an almost total lack of objective statistical information in government about the operations of private sector energy companies, created serious difficulties in the development and enforcement of regulations. These difficulties, together with the ambiguous results of the three-year-old economic stabilization effort, resulted in damage to its credibility from which the program never recovered. The credibility problem began with the fact that there was, from the start, a hidden agenda in the program’s purpose. The allocation and pricing program, while ostensibly aimed at insuring adequate supplies of fairly priced petroleum products to customers, had as an unstated purpose the preservation of specific segments of the domestic oil industry, consisting primarily of independent petroleum refiners and marketers. Pressures for a program to insure the survival of these operators through subsidized access to crude and product had begun long before the rise of OPEC as market forces had moved to eliminate refiners and marketers without such access. The boycott merely provided a publicly acceptable rationale for a program long sought by this politically powerful interest group.
The petroleum-allocation and pricing regulations were even less successful than the earlier attempts to attain economic stabilization. Unlike the price and wage freeze of 1971, there was no period of high initial public acceptance and program success. The only significant beneficial result of more than half a decade of industry regulation was that these programs gave the United States time to adjust before it suffered the full impact of the new world energy prices. This adjustment was accomplished by assuring all segments of the petroleum industry of minimum levels of supply and by mixing low-cost, price-controlled domestic petroleum with high-cost, imported petroleum to achieve a blended price that was lower than world norms.
This delay in price increases was offset by the costly inefficiencies caused by unforeseen misallocations of resources. For example, the built-in, small-refiner bias tended to keep uneconomic refinery capacity in operation past the time when it would have ordinarily been retired, and it even led to the development of additional “tea kettle” capacity that would never have been brought into being without the controlled access to subsidized crude. The protection the program provided for independent marketers preserved unneeded service stations, thus increasing delivery costs to ultimate consumers. The delay in price increases caused by controls slowed development of alternate domestic energy resources, whether from conventional or exotic sources.
The petroleum regulatory programs of the seventies breathed their last in 1979. The public perception of regulatory failure was underlined as, for the second time, after half a decade of controls, gas lines wound up hill and down dale. As the petroleum allocation and pricing regulations slipped from view, they took with them much of an older regulatory program controlling interstate natural gas at the Federal Energy Regulatory Commission.
Why did the ten-year U. S. economic- and resource-control effort largely fail? What are the long-term implications of that failure for American society and American government?
The failure was attributable to a range of factors. Certainly a paucity of experienced personnel, a lack of commitment to creating organizations adequate to the task at hand, and administrations that were uncomfortable with the idea of federal regulation did nothing to insure the success of the programs. These are all matters, however, that could have been positively affected by public opinion or by energetic public administration, had there been the will to do so. But other forces, external to policy development or program operation, led to the downfall of peacetime economic regulation.
The American economy is now subject to sudden change in a way that was not the case before the Korean War. The introduction of new products now takes place at a rate unheard of in the years during and immediately after World War II, the last period in which there were successful U.S. economic controls. This rate of innovation is so rapid that reliable standards against which economic behavior can be measured and controlled are virtually impossible to devise.
Since the early 1970’s, the U. S. economy has become increasingly service oriented, and this, too, makes effective economic regulation harder. It is much more difficult to account for the cost of services provided than it is for goods made and sold. A service economy lends itself to off-books activity in a way that manufacturing or agricultural activity does not, as has been discovered by internal revenue officers in this country and those of other advanced economies such as those of Italy and France. While it may eventually be possible to effect an accountability for services that approaches that available for goods, it could not be done in the seventies—and still cannot be done today.
Then, too, international economic pressures now impinge on the U.S. economy to an unprecedented degree. Imports were totally excluded from the general controls of 1971—74, and prices of imported items continued to rise not only for luxury goods, such as perfume and wine, but also for basics such as cars, low-cost clothing and fabrics, shoes, and electric appliances. As has been noted, price increases in this sector contributed to the ineffectiveness of Phase II. The petroleum price-control program had as its sole reason for being the sharp rise in prices of oil imported from OPEC. And this program was only able to effect a temporary and limited delay on the ultimate cost, a delay that had numerous adverse results. Control of economic activity within our own borders has become less possible as we have become less self-sufficient and more interdependent on the economics of other nations. We can not set enforceable prices on commodities in our domestic economy when a significant amount of such commodities is imported from nations over which we have no control.
Enhanced communications have also made economic control programs more difficult to administer. The vividly human individual injustices that necessarily arise from the operation of wage-price freezes or petroleum allocation are made immediately available on a national scale, while whatever good may be accomplished is subtle, abstract, and receives less coverage. The mass media generate pressures, first for individual relief, then for general relaxation of controls, and finally for total control abandonment.
If these are some of the most important reasons why peacetime economic regulation failed in the 1970’s, what can be said of the impact of the control program as it was experienced? Certainly little that is positive and much that is negative.
Controls produced a disastrous decline in public confidence in government. The credibility of federal economic regulation moved from the firm support of the freeze to widespread suspicion and theories that the gas lines were caused by a conspiracy between the government and the big oil corporations. How much public support now remains for serious federal peacetime economic regulation is, therefore, an open question.
Actually, such regulation resulted in serious damage to U.S. economic growth. The failure of three administrations to adhere consistently to stated regulatory policy, their inability to attain set goals (diminished inflation, energy independence), and the uneven and unpredictable management and enforcement of the programs have all been detrimental to long-range planning by private-sector companies and investors. These price-control and resource-allocation programs gave a new and frightening dimension to the measure of economic risk. A psychology developed in the private sector that motivated business to seek profit in regulatory quirk rather than in long-term productive economic activity. This focus in turn led to an emphasis on marketing, with an accompanying neglect of research and development and investment in capital plant and equipment. The price for this myopic vision is being paid today, as some of America’s largest economic enterprises frantically work to meet the competition of companies from countries whose governments did not impose massive economic regulation in the previous decade.
An entire generation of rising career civil servants went through a baptism of fire on the economic control programs to unfortunate results. Many were exposed to too much power too soon. The highly politicized control programs (with a large number of civil service-exempt positions, the agencies quickly became a major source of patronage for both parties) placed a premium on short-term, media-appealing performance. As a result, numerous young careerists, for whom the control program was a first or second assignment, came to mistake technical polish for seasoned judgment. A certain cynicism, a desire to “look good” became all-pervasive. A short-term approach to public administration, not unlike that which simultaneously arose in private-sector management, took hold. Now in their mid to late thirties, those still in government have had to turn back and learn the lessons that come only by increments in public life. But the disillusionment caused by program failures and the ultimate rejection of such programs by both government and the public have led to the loss of many potential leaders of the civil service. Some have left for the private sector; others have copped out, taking low-profile, passive roles in government. In many cases, they appear to suffer from a form of delayed stress syndrome, having been told to do the impossible without adequate support and then being blamed when the impossible proved to be just that.
These, then, were the sad and significant consequences of a decade of attempted economic regulation. The initial dampening of inflation achieved at the start of wage-price controls was thrown away, and new, more vicious inflationary pressures soon arose unfettered to wreak havoc with the economy for more than half a decade. The effectiveness of petroleum allocation as a consumer-protection measure never proved its worth. Increases in energy prices were at first slowed and then allowed to balloon in the late seventies. The results were permanently higher consumer energy prices and incentive signals so mixed that industry did not respond with strength to ameliorate the shortage through innovation and expansion.
Thus there can be no doubt about the grievous costs of peacetime economic regulation. The damages—lessening of faith in government, failure to meet program objectives, disillusionment of the promising young—all smack of a domestic Vietnam. At a minimum, America’s experience has effectively eliminated peacetime wage-price controls and resource allocation as a realistic option for coping with economic difficulties. It is just as well that the economic regulators finally lost their lease at 2000 M Street. Almost any new tenant, from law firm to quiche palace, will prove more useful—and less harmful.