Interview

C. Jackson Grayson November 1 1976

Interview

C. Jackson Grayson November 1 1976

Interview

C. Jackson Grayson

From November, 1971 to January, 1973, C. Jackson Grayson Jr. was chairman of the Price Commission under the U.S. wage and price controls program. In 1972, the only full year during which mandatory controls were in effect, the consumer price index rose by only 3.2%—the rise has been double and sometimes triple that rate since—but Grayson believes, nevertheless, that the controls were a mistake, and his experience in Washington sent him back to his home in Dallas to write a book, Confessions Of A Price Controller, and to found the American Productivity Centre. By promoting productivity, the centre hopes to provide an alternative to controls to combat inflation and preserve the free enterprise system. Grayson is currently on leave of absence from his post as dean of the school of business administration at Southern Methodist University, heading a drive to raise the minimum $22 million required to fund the centre. Shortly before Thanksgiving weekend, the anniversary of wage and price controls in Canada, Grayson was interviewed at the centre’s office in Dallas by Walter Stewart, Maclean's Washington correspondent.

Maclean’s: Would the United States be better off if there had been no program oj wage and price controls?

Grayson: Yes.

Maclean’s: Why?

Grayson: Because of the net effect of controls, their well-known distortions of investment, the inefficiencies they cause, the tendency to not work on the causes of inflation—that is, you tend to expand your monetary and fiscal policies a little bit more because you figure the controls are going to save you. Then there is the evasion controls begin to cause, and the tendency to keep going—that is, you begin to look at export controls and exchange controls as you get further and further into it. All of these things are disadvantages, and I think they outweigh the advantages.

Maclean’s: What are the advantages? Grayson: The advantage is temporary relief from inflation. And there are three ways that I think controls can impact on inflation. One is, they can reduce inflationary expectations for a while. That’s probably one of the greatest advantages. It hits at expectations that inflation is going to continue to spiral and spiral. When you do that, you are doing a service in that you’re slicing into that wage-price spiral. Secondly, it influences the timing of wage and price decisions and thereby gets you out of

an immediate burst. And third, it intrudes on whatever market power labor and business have in the marketplace. I say “whatever,” because that’s a highly disputed allegation—the power of unions and oligopoly to administer prices and wages. There is some element of truth in both

CONTROLS INCUR MORE EVILS THAN INFLATION, AND DON'T SOLVE THE INFLATION PROBLEMS

cases, but where we start to part company is in how much there is of that in the marketplace. But, whatever there is, controls do intrude on it.

Maclean’s: The two most important of these considerations, reducing inflationary expectations and influencing the timing of wage and price decisions, would be considerably enhanced if wage and price controls were a permanent part of the economy, would they not?

Grayson: I think it would be a disaster to consider controls to be a permanent feature of any capitalistic economy. There’s no question but that over a period of time that leads to stronger and stronger state regulation, and eventually control, and even ownership.

Maclean’s: Did you consider the controls to

be successful in what you set out to do—slowing down the rate of inflation?

Grayson: Yes. My belief is that we probably pulled down inflation versus what it might otherwise have been by 1% to \Vi%. But that sometimes only pushes the pressures further out, so you build a bulge for yourself. That’s one of the reasons you tend to keep on controls.

Maclean’s: But as long as people have it in their minds that this is a temporary program, the bulge is implicit. If you were saying to them, “This is the way it’s going to be, folks,” that expectation would disappear. Grayson: That’s true.

Maclean’s: But your argument is that the distortion is too great?

Grayson: Too costly for a capitalistic system. And it eventually leads to a higher degree of mix toward more of the planned socialist-type system. I was increasingly led toward greater and greater controls. We had on our drawing boards a plan to go very deep into the economy, a price control strategy that started to control on product lines. Now this was never implemented, but we were getting the machinery in place to do it, because you simply cannot keep the controls on lightly, in view of the high complexity of the economy and the interdependencies. When you press down in one area, you leave out an area somewhere else that people naturally flow to, and in turn you have to expand the controls. Maclean’s: J. K. Galbraith, one of your favorite economists, said in Economics And The Public Purpose: “The President's economists, finding that the policy of control had moderated inflation, jettisoned most of the controls. The notion that if a policy is working it should be abandoned reflects a novel approach to public affairs. ”

Grayson: Mr. Galbraith and I have talked about that, and I disagree with him strongly. He made the remark that the reason the controls were not more effective was that the people who were in charge didn’t believe in them.

Maclean’s: But that, in your case, is a fair criticism.

Grayson: It’s true, I did not believe in them. I didn’t believe in them when I went in but agreed to take the job because I believed that, if someone were to control, then it ought to be someone who believed in doing the least damage to the economy, and getting out as fast as possible. Maclean’s: In essence, Galbraith was right. Grayson: Well, the policy was working at a time when controls have the greatest amount of impact, which is when you’re coming off the bottom of a recession when

you still have a lot of slack in the economy. The controls work better then than they were beginning to work with demand inflation coming. It was time to quit. Once the economy starts to reach higher and higher levels of capacity, you begin to switch to demand inflation, which is harder to control. So the best time to quit is when you’re winning.

Maclean’s: But you can control demand inflation by other levers of economic policy, by fiscal and monetary policy.

Grayson: And that’s the way it should be tackled, instead of with controls. Maclean’s: There is a very clear suggestion in your book that when controls came in they were not a matter of choice but the tyranny of circumstances. Were there at that time any politically acceptable alternatives? Grayson: Nixon didn’t feel so, and he had the support of most businessmen, somewhat to my surprise. I knew that a lot of businessmen felt that things were getting out of control, particularly with labor, and therefore the price that they were willing to pay was controls.

Maclean’s: But wasn’t that a reflection either of a failure of the free-market system or a failure of nerve, a suggestion that Americans don’t believe the free-market system will do what you people keep telling us it will do?

Grayson: Well, there are too many businessmen and labor people who are not acting on their beliefs in the free enterprise system, and that could lead eventually to its collapse. Economist Joseph A. Schumpeter pointed this out a long time ago: he said that businessmen themselves were trying to torpedo the system they champion.

Maclean’s: There is, in fact, a fair amount of evidence that both business and labor are doing their damnedest to avoid anything that looks like competition.

Grayson: It’s called self-interest. Maclean’s: How do you go from such a position to suggest that, somehow, on behalf of the ideology of free enterprise, business and labor should stop doing that?

Grayson: Oh, I can argue that they should stop, but I don’t have much belief in the efficacy of my appeals. Appeals for voluntary restraint on wage and price increases are probably not going to work. Maclean’s: Is it possible to control one side and not the other, to control prices and not wages?

Grayson: No, I do not believe that. Maclean’s: France has, in fact, controlled prices and not wages.

Grayson: That’s right. France is about the only nation that has tried that, and France has a kind of unique semi-planning system by which there are in effect some indirect controls on the other part of the system. Maclean’s: When you asked the Internal Revenue Service to check the compliance with price controls, they found a compliance rate of 9 5%. Didn’t that indicate a fairly general acceptance of what you were doing? Grayson: Yes, but there were two things

working. There wasn't the pressure of demand inflation for people to find ways to evade and avoid. As time went on, I believe that percentage would have dropped. And second, we hadn’t had the number of people who began to perceive unfairness in the system, whether it’s true or not. A price rise is like a speeder on the highway. You say, “Well, if he’s going up, I will.” So in the beginning you don’t get many observed differences. And. of course, it’s a nation, still, of fairly law-abiding people, in

IT’S BECAUSE I DON’T BELIEVE IN CONTROLS THAT I AGREED TO TAKE CHARGE OF THEM

people say, “Well, I don’t like it, but it’s law.”

Maclean’s: You write in your book, “A control program can remove degrees offreedom in order to achieve standardization. ” Doesn’t inflation remove freedom? Isn’t a controls program simply a way to try for more equity?

Grayson: Inflation has a lot of evils associated with it. I think controls incur more evils and don’t solve the inflation problem. Temporarily, it can give you some relief on the front end, but those reliefs are not worth the price.

Maclean’s: Again, you say, “We could have done no more without altering the orientation of the economy and in the end being defeated by the public. ” But in the polls taken at the time the public seemed to be very happy with the controls. Indeed, they wanted more controls. What makes you think the public wouldn 't welcome “altering the orientation of the economy?”

Grayson: This is true, but as time went on.

the polls began to show increasing disenchantment with controls. It is true that at the time they were ended people still wanted the controls, but my belief is that the longer you go on with them the more opinion will start to turn the other way. Maclean’s: Is it possible that in fact the controls on wages were more effective than the controls on prices?

Grayson: That’s what George Meany argued as the head of the AFL-CIO. I said I didn’t agree, because real wages rose. If wages are, in fact, going up less than prices, then real wages will fall once you apply the deflator index. The evidence therefore is that wages were rising faster than prices. But people don’t believe that. The average person doesn’t encounter gross national statistics; he encounters an increase in the price of lettuce and does not remember any decreases. He sees what he thinks are prices going up while his wage stands still. Therefore there is a general feeling that the system controls wages but not prices. Maclean’s: Isn’t it also possible that the wage freeze was immediate and visible, that the price freeze didn’t begin to take hold until after some time, and that when that really began to bite there was a business reaction? Grayson: That’s one of the factors. Maclean’s: So that labor unions, with that broadmindedness we all carry to the ills of others, were willing to accept price controls, and businessmen were willing to accept wage controls, but neither wanted it back home?

Grayson: That’s true. Plus, food is one of the most sensitive items in the public’s perception and also happens to be one of the hardest things to control.

Maclean’s: That leads us back to J. K. Galbraith, who says that there are two economies, and that food is out in the market econ -omy, open to competition, and that all the major manufactures are in the planned economy. He argues that you should control the planned economy and let the market economy go.

Grayson: Well, we looked at that. The planned economy, in the Galbraithian model, is the oligopoly of concentrated industries, and when we made a survey of the price increases the smallest price increases came from that sector. The highest prices came from the competitive markets, primarily food.

Maclean’s: But that could be an argument for Galbraith, not against him, because it could argue that it is possible inside an oligopoly to administer prices and still maintain a profit target.

Grayson: Yes, that’s right, it could. Maclean’s: We all accept and welcome many controls—on telephone rates, airplane tickets, energy costs.And we know there are business controls, with cartels and price-fixing. Isn ’t some kind of control the norm, and isn’t the question merely whether the controls will be applied by the government or by corporations?

Grayson: I believe that this is where ideologies cross. I believe there is planning and

control in the system, but by the market. The market is imperfect. There are cases where there is price fixing and collusion, and these are well publicized. I strongly support antitrust efforts, and based on that I still believe that that is the best regulation system, rather than using the government regulation system that some people believe would be fairer. I do not think there is a better way. I submit it is a regulated system, regulated by the desires of people to compete and provide the best allocation of resources. It is imperfect, but I think that the government antitrust effort is the best instrument to try and overcome these excesses.

Maclean’s: But isn’t that kind of law inappropriate? It tends to make a crime out of an economic misdemeanor, which may be acceptable in Russia but not here. If you lined up half a dozen tycoons and shot them, it would undoubtedly have a chastening effect on the marketplace, but is that really appropriate?

Grayson: You can have an effective law. There have been quite a few publicized cases here. I sit on seven boards of directors and observe the many ways we are careful to avoid antitrust implications. I can’t argue that this is the perfect system, but the alternative is worse.

Maclean’s: When the demand for cars went down, the price of cars went up. Doesn’t that suggest that there is something very screwy in the theory of supply and demand? Grayson: There are structural blocks in our system, structural blocks to competition, both on the business and the labor side. And those are the things to work on. We’ve got such things as fair trade laws, and the minimum wage, which prevents wages from following their natural course downward, and the power to enforce higher wages by threats of strike, etc. And there are things like the Interstate Commerce Commission. We have built up over time instruments by which competition is not being allowed to work as effectively as it should. It is suspicious when prices do not come down following a recession, and it does give credence to a suspicion that there is an administered market on both sides. But I don’t buy the next jump, which is that because there are administered markets we have to have controls.

Maclean’s: You cite the distortions imposed by controls, but aren’t there distortions in every economy? In Washington, for example, the price of beer per ounce is lower than the price of milk.

Grayson: You’re trying to put your value system on the market.

Maclean’s: Doesn’t everyone? There are few advocates for the free enterprise system in the slums of Harlem or Los A ngeles. Isn’t the question, since you already have distortions, who is going to be hurt? You’re a very comfortable man, and it’s easier for you to say, “Let the folks in Watts look after themselves” than it would be for someone in Watts to say the same thing.

Grayson: Okay, I still think this system has

delivered a higher level of income and equality—that is, equality of opportunity rather than equality of result. We don’t have the equal results you have in some other societies that have mandated it, but I think the opportunity is there, and that’s what I want to preserve, the freedom. The counterargument is that these people don’t have the opportunity because they were born into the wrong family or the wrong race, and that I want to correct. But when you move too far the other way, to try to treat unequals equally, you’re also removing degrees of liberty, which I value highly.

TO MOVE TO TREAT UNEQUALS EQUALLY IS TO ALSO REMOVE DEGREES OF LIBERTY

Maclean’s: “The law in its impartial majesty prohibits both rich and poor from sleeping under bridges”?

Grayson: The argument is very old, between equity and opportunity.

Maclean’s: But isn’t the reason that we seem to be going more toward a centrally planned economy thefact that equality is becoming an increasingly important issue? Grayson: I think the desire for equality is driving more and more countries toward a planned system, but it’s an explosive mixture in that if you go too far you remove liberty.

Maclean’s: There is an underlying assumption in what you say that the public won’t standfor much interference with the present system, but then you say the public wants more, not less, control of business and labor. Isn’t that a flat contradiction?

Grayson: It’s a paradox in that people say we’re for free enterprise but want more from government.

Maclean’s: Your argument is that the pub-

lic doesn’t understand the free enterprise system. Isn’t it possible that the public does understand it and doesn’t think much of it? Grayson: Well, they’re faced with some of the things that don’t look good. They look at those results and don’t like them. Is there a better way to help the people in the slums? As yet, I don’t believe a return to controls will help these inequities. Maclean’s: Isn’t it true that ifpeople don’t believe their system is delivering its benefits fairly, they will simply reject that system? Isn’t that what happened in 1971?

Grayson: That’s right. That’s why Nixon was able to introduce controls.

Maclean’s: What do you think the American perception is now?

Grayson: We’re looking at that. A lot of polls suggest that there is still a lot of support for private enterprise, but a lot of people don’t know what the words mean. They think private enterprise has something to do with government.

Maclean’s: They would be right, if they’re referring to Lockheed.

Grayson: The polls are reporting on the one hand a belief in private enterprise and on the other hand a belief that we should control prices and control the big unions. Maclean’s: What is your alternative? Grayson: I would not do anything to redistribute wealth, except to those at the very bottom of the heap. I would give government a role, but I would in every case ask if there isn’t a way to look more to private enterprise. I would not want to go back to laisser-faire, but I think we should always make the test: can’t it be done by the private sector? National health insurance is coming up right in front of us, and I think that if at all possible that ought to be delivered by the private health carriers rather than by a government insurance corporation. The same with energy, oil and gas, in which a lot of other nations are going the other way, to state ownership. Always the test should be, can’t we find a way to have private enterprise do it? Because it produces the highest productivity. There may be arguments about its equity, but there is no question about its efficiency, which will help the man at the bottom end of the income distribution scale in the long run. You do more by growth, which raises the absolute level of the ship.

Maclean’s: You grow and the benefits trickle down?

Grayson: That’s right.

Maclean’s: Regardless of what you think should happen, do you expect this country to go back to wage and price controls? Grayson: I expect them to go back to some form of them. I don’t think they will come back as rigidly as we went into phase one and phase two. I think they’ll come in the form of guidelines and jawboning, as the first phase. And if inflation continues, then I think there’s no question that we would go back to direct wage and price controls. I’m not forecasting them, because I don’t think inflation and high rates are inevitable, but if they do occur we will do it.;£?