sentation at the bargaining table, and certain tax incentives, such as a variable investment tax credit. Shultz's Response; Shultz Memo to the President Between early August and the first of September, the C-8 group occasionally discussed in very general terms the need for such reform initiatives, but there was no detailed review of the staff work, which was intensively underway at the Cost of Living Council. The first time that the staff analyses were explored in any detail was on November 1. In addition to actions such as release of stockpiled materials and better review of agricultural marketing orders, there were a number of highly controversial legislative initiatives, as might be inferred from the brief synopsis above. While Shultz was in favor of reform, he was concerned that many of these were economically unsound and that others were entirely impracticable and likely to be so controversial that any leaks about their nature could undermine the entire planning process. His November 15 memorandum to the President suggested two options for making reform a part of the anti-inflation strategy. The bolder alternative would involve a listing of such actions as submission of a new farm program which offered income protection but did not involve support of commodity market prices or artificial constraints on production; actions to increase oil imports; legislation to repeal the antitrust exemption for state fair trade laws; legislation to deregulate surface transportation; and legislation to encourage area-wide multi-employer bargaining in the construction industry. With respect to this bolder option, the memorandum pointed out: A package of this nature would be a concrete representation On the other hand, the package would be so controversial The second alternative would involve a Presidential statement pointing out that some government policies can have an adverse effect on price levels which must be avoided. The Cost of Living Council would be charged with an ongoing review of government policies for their possible inflationary impact. Further consideration of the legislative initiatives was turned over to those persons outside the Stabilization Program charged with related policy development-presumably OMB. Ultimately, the agricultural legislation, oil import, and transportation deregulation proposals were made, but not within the framework of a comprehensive stabilization policy. "TROUBLESOME SECTORS": THE CISC MODEL; SELECTIVE CONTROLS A substantial part of the planning effort between early August and mid-November was devoted to analyzing the troublesome sectors which had been suggested by Shultz in the August 2 meeting: health, food, transportation, state and local government, and construction. The staff sought to identify the characteristics which might make these sectors amenable to specialized treatment and to identify a mixed strategy of administrative or legislative reform combined with an organizational structure which would permit specialized intensive governmental attention to the problems of these sectors. Construction Prior to the establishment of CISC in March, 1971, wages in the construction industry and construction costs were increasing significantly more rapidly than other sectors of the economy. Very large settlements were distorting previous wage relationships and resulted in pervasive attempts by workers in different crafts and localities to equal or better the largest related wage settlements. It was recognized that CISC provided a new institutional mechanism to rationalize the wage structure in construction, to improve the bargaining process and to restrain the cost escalation that was diminishing the market for the most highly skilled portion of the work force. The willingness of organized labor to participate in the initiative was attributed to the erosion of their competitive position, loss of jobs, growing loss of control over locals, and the threat of continued suspension of the Davis-Bacon Act. CISC was viewed as having been successful in reducing the number of work days lost due to strikes as well as restraining the rate of wage increases. Efforts were then under way to rationalize the wage structure geographically and among crafts. There was also an effort to encourage agreements covering larger geographic areas and movement toward common expiration dates of collective bargaining agreements, in order to reduce leapfrogging between crafts and regions. But these efforts to improve the collective bargaining process were incomplete as was realignment of wage patterns resulting from the pre-CISC inflation. It was thought that continuation of CISC during 1973 would permit substantial attainment of these objectives after which competitive forces could be effective in restraining wage growth. Thus, from the beginning it was thought desirable to retain CISC as a tripartite entity reporting to the policy body. Authority for bipartite craft dispute boards reporting to CISC would be continued. On the price side, the recommendation was to continue the Price Commission regulation which provided that construction prices predicated on wage rates subsequently reduced by CISC would be subject to renegotiation by the parties to the construction contract. Because of the perceived success of CISC and the relative independence of its operation in Phase II, there were almost no changes made in this basic concept through the planning process. Public Employee Wages The wages of public employees were a significant concern to the planners because of rapid growth in the size and costs of the sector, its vulnerability to strikes that interrupted essential services, and rapid unionization. The monopoly and monopsony characteristics of the sector, combined with the militancy of labor organizations and limited maturity of the collective bargaining process, suggested that some form of government intervention might be helpful. Further, the phasing-in of revenue sharing gave the Federal government a special interest in ensuring that this new form of assistance was not eaten up by inflationary wage increases, thus precluding improvements in services and relief of pressures on state and local revenue sources. Relying heavily on CISC as a model, the C-8 staff developed a proposal for a tripartite pay panel which would exercise direct control over pay increases for state and local government employees and would participate in the Federal mechanism established under the Federal Pay Comparability Act of 1970. The principal objective was to exercise control over state and local government pay, but it was believed that resistance to such a step could be reduced by also subjecting Federal pay to control by the panel. A nine-person panel was to include equal numbers of representatives of employee organizations, public officials, and public members. Consideration would be given to choosing public officials from the National League of Cities and the Council of State Governments. The Chairman of the Advisory Committee on Federal Pay established by the Pay Comparability Act would be one of the public members. This tripartite character was in contrast to the Phase II Committee on State and Local Government Cooperation, which included mostly employer representatives. It was thought that the panel might operate through regional "craft" boards representing major occupational groupings, like CISC. As with the other sector panels under consideration, growing concern about the statutory requirement for Senate confirmation of the members of such groups led to relieving the panel of direct decision authority and converting it into an advisory group. Thus when the final package was prepared in late December and early January, public employee wages were to be retained under mandatory control and a tripartite advisory group would assist the Council in administering those controls. At the last minute, however, intervention by Arnold Weber caused the Public Employee Advisory Committee and mandatory controls to be dropped from the Phase III structure. Weber had been briefed on the outlines of the program at Shultz' request in order to get his reactions, as the first operating manager of the Stabilization Program. It was Weber's view that the conditions of the public employee sector did not lend themselves to direct Federal intervention. In particular he pointed out to Shultz that controls would have no real impact on the effect of the new revenue sharing dollars and he questioned whether the maturity of the union movement and incoherence of the bargaining relationships were such as to be responsive to CISC-like treatment. Apparently because of his arguments, the committee was dropped before Phase III was actually announced. Health Services The health care sector was identified as another area which warranted continuation of some mandatory control mechanism, because it was inherently inflationary. The vast majority of people treated in hospitals were covered by some form of insurance, and once they were hospitalized neither the patient nor the hospital had an incentive to minimize costs. Strong increases in demand, coupled with rapidly increasing wage rates, resulted in cost pressures which were not likely to be resisted effectively because of the lack of a strong incentive to constrain costs. The institutional framework-a separation of the providers of service, the recipients of service, and the payers did not lend itself to a system of cost control by competition. The proposed substantive approach to controls would focus on average cost per patient-day as opposed to prices for discrete services which had been the focus of the Phase II controls. If overall cost increases were restricted, hospitals would be forced into a budget allocation process which hopefully would result in greater efficiency. Such a system might be administered through the Social Security, Medicare/Medicaid reimbursement system. Thus, third party payers would be used as an indirect lever to enforce the cost constraint regulations. To administer the program, the C-8 staff considered the establishment of a health stabilization committee. The panel would include five public members, although there was periodic consideration of adding government membership such as OMB, HEW, and possibly the National Commission on Productivity. Continuation of wage controls in the industry also was identified early as desirable because of the importance of rapidly rising payroll costs to the overall inflationary problem. It was not thought, however, that tripartite machinery would be applied to administer the wage controls; rather, the health stabilization committee would also set and administer wage standards. The desire to centralize policy control in one body, and possibly a desire to avoid the need for Senate confirmation of members of the Committee caused the health panel to be converted later in December into an advisory rather than a decision-making body. The importance of interagency involvement in setting Phase III health policies was finally accommodated by a dual committee structure, which paralleled the emerging proposal for the food sector. Thus, a subcommittee of the Cost of Living Council in addition to an outside advisory committee, was finally recommended to the President and accepted. Because of the need to involve the key interests in the industry in the development of cost-containment regulations which were likely to be controversial, and because of the determination to establish an advisory committee with real "clout," it was decided to continue the Phase II controls in the new organizational structure pending development of new regulations by the new committee. Transportation The transportation industry was identified as a candidate for special treatment primarily because 1973 would be a heavy year for wage negotiations. Industry-wide contracts would be written for twelve rail unions, representing 494,000 workers, new trucking agreements would be negotiated, involving 220,000 workers, and nine airline contracts would expire, involving about 36,000 workers. But the sector was also perceived as one in which rate regulation had produced impediments to productivity improvement. Thus, the attention of the planners was focused on a mechanism to restrain wage increases and to improve the structure of rate regulation. It was thought that some type of informal intervention in the wage negotiations might be as effective in restraining inflationary increases as mandatory wage controls because of the relatively small number |