The Voluntary Pay and Price Standards Have Had No Discernible Effect on Inflation

PAD-81-02: Published: Dec 10, 1980. Publicly Released: Dec 10, 1980.

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The pay and price standards administered by the Council on Wage and Price Stability set guidelines for changes in individual prices and wages. The purpose of the standards was to reduce inflation while avoiding a temporary surge in unemployment. Whenever measures have been taken to restrain inflation, they have normally been accompanied by increased unemployment, while steps taken to stimulate employment have usually produced a higher rate of inflation. An anti-inflation policy which avoids this trade-off, even at the expense of minor inefficiencies, is clearly desirable. None of the repeated experiments with wage-price standards which have been tried in the United States and other industrial countries has been completely successful. GAO reviewed the economic record of five countries: the United States, the United Kingdom, Canada, Norway, and West Germany.

The Council should refocus its anti-inflation efforts. Currently, the Council's highest priority is to develop and monitor voluntary standards for pay and prices. It is doubtful whether these short-run measures have been effective in restraining inflation or preventing unemployment. The Council has devoted a small portion of its resources to longer-run anti-inflation objectives where the potential for effective action is greater and which could benefit from an increase in resources. To succeed, a wage-price guidelines program must change the behavior of wage and price setters, be credible, and modify expectations about further inflation. None of the programs which GAO surveyed established and maintained credibility. Inconsistent monetary and fiscal policies and outside events have undermined the programs. To evaluate the effectiveness of any program of wage-price guidelines, three questions must be answered. Did the rate of inflation decline after the guidelines were established? Was a recession avoided during the program? Is there a wide range of econometric evidence showing a statistically significant effect of the program on the rate of increase in wages and prices? The current program's standards meet none of these criteria. GAO questioned whether the current pattern of monitoring noncompliance with standards represents a wise use of the Council's limited staff. It has reduced the Council's usefulness as an information gathering agency. Without mandatory economic controls, the Council's power to punish those who violate standards is limited.

Matter for Congressional Consideration

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Matter: The Congress should reauthorize the Council on Wage and Price Stability for another year to give specific attention to the chronic inflation problem.

Recommendation for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Council on wage and price stability should refocus its efforts in monitoring inflation and reallocate some of its resources to higher long-term payoff areas.

    Agency Affected: Council on Wage and Price Stability

 

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