a growing desire to re-involve organized labor on a more formal basis. After Phase III was launched, a similar concern played some role in the first dramatic step back into controls-the imposition of the meat ceiling on March 29, 1973. PHASE II APPENDICES Coverage of Price Surveillance (October, 1972 CLC Staff paper) Issue What should be the coverage of the price-costs-profits review process? Administrative arrangements and substantive standards that can be exercised selectively are necessary for an effective and administratively feasible program of price control. While a general standard of economic performance will be promulgated, the standard should be applied differentially to different sectors of the economy by using varied administrative procedures. Thus, there are really two separate but closely related issues subsumed under coverage: 1. What kind of administrative procedure should be developed to control business pricing? 2. How should the different price-control sectors be identified? Issue #1: What kind of reporting and approval procedures should be established to control the price behavior of individual firms, and how should these procedures differ among the various sectors of the economy? Characteristics of the Procedures 1. Rigorous procedures and standards will be applied to dominant firms in strategic sectors. There would be at least an implicit threat of some cost absorption and reduction of profit margins when proposed price increases are particularly large. Downward pressures on prices and costs would be spread in this manner to other sectors such as the firm's suppliers. 2. Some consideration would be given to pass-through of increased wages and other costs in permitting price increases. The degree to which full pass-through would be permitted would depend on various factors, but especially on the size of the increases and the extent to which they could not be avoided because of supply and demand conditions. 3. Pricing rules would not automatically permit full pass-through of costs in all cases. Price adjustments would be necessary to reflect cost changes in the production process, but precise and automatic rules governing the degree to which passthrough is allowed should not be spelled out. Implementing a system of rules carefully designed for complete and automatic pass-through of costs throughout the production process would amount to little more than an elaborate computational overlay to rationalize for the pricing authority a pattern of price changes that would have occurred in its absence. Type of procedures and degree of stringency Differential procedures would be designed for administrative flexibility to permit progressive decontrol or escalation of the level of scrutiny as a sanction. 1. Prenotification Firms in the prenotification category would be required to report proposed general price increases, or price changes that would have the effect of significantly increasing a price index of the products they sell, appropriately weighted by sales volume. The Price-Cost-Profits Commission would have the option of requiring firms to delay implementation of price increases until explicitly approved by the Commission. 2. Reporting Firms in the reporting category would report, perhaps quarterly, on overall price changes and profit margins. Reporting might have some disciplinary effect, and the intensiveness of scrutiny would be a matter of administrative discretion. 3. Non-Reporting Firms in the non-reporting category would be subject only to general surveillance through information from price indices, trade journals, and perhaps from complaints or public attention. Firms might be shifted to this category in part on the basis of favorable price behavior. Options The procedural options essentially consist of 1. The extent to which the system required clearance of price adjustments in advance versus post-reporting and audit. 2. Variations in the amount and type of information required of firms. 3. The intervals at which such information would be reported, and 4. The degree to which the information would be analyzed to determine compliance. In addition the number of firms to which the procedure might be applied could be varied. Recommendations The pattern of procedures recommended here is based on the tenative classification of sectors of the economy recommended for Issue 2 (below). Further refinement of the proposed classification by more detailed product classes would probably increase the number of firms subject to prenotification and reporting, and thus increase the administrative burden of the system. Additional analysis of the extent to which the suggested procedures are administratively feasible for the sectors identified may indicate that the pattern of procedures should be altered. However, this initial classification is sufficient to give a rough idea of the administrative implications of this approach. 1. Firms Subject to Prenotification If prenotification were required for the five largest firms in the sectors of the economy included in Group I (Issue #2, below), and for about 50 other large firms selected from industries in Group II, about 300 firms would be submitting reports on proposed price increases. 2. Firms Subject to Reporting If reports were required at quarterly intervals from another tier of firms in industries in Group I (an average of 10 per industry), from the 10 largest firms in each industry in Group II, and for an average of 5 firms per industry in Group III, approximately 2,000 reports might be received that would be subject to audit. 3. Firms not Subject to Reporting This would have the great majority of business firms-but not a dominant proportion of total economic activity-subject only to general surveillance and exhortation. Issue #2: How should the different price control sectors be identified? Background The number and diversity of firms and prices throughout the economy is too large to make detailed control of all prices administratively feasible. Consequently, many small firms were exempted during earlier periods of extensive price controls. However, large firms in strategic industries need to be covered because they contribute heavily to the general price level, and are generally highly visible. Moreover, wage restraints will likely be applied to workers in these industries. Despite the need for standard guidelines of recommended price behavior for the entire economy, simplicity should be a major consideration in setting up administrative machinery to carry out a selective price control program. A. Criteria Considered in Selecting Industries for Coverage 1. Concentration The ability of an industry to "administer" prices, over which controls might be desired, is closely associated with concentration-i.e., a small number of large firms dominating the industry. In addition, surveillance over a concentrated industry provides control over a large fraction of the industry's activity with a minimum of administrative effort. 2. Absolute Size Large industries, with high sales volumes, contribute substantially to movements in overall price levels both at the wholesale and consumer level. Accordingly, controlling the prices in leading firms of large industries would be a major factor in limiting general inflation. Futhermore, the size of the firm included is a factor in holding down the administrative costs of control. 3. Visibility The public visibility of price increases in an industry is a major consideration in determining coverage. Highly visible price increases have been a major contributor to inflationary price expectations. In many cases highly visible industries also tend to be large and highly concentrated, although rental housing is a highly visible sector in which effective control would be difficult. 4. Basic Industry Basic industries tend to be those that produce products for intermediate inputs, which are incorporated into a wide range of final products. For example, an increase in the price of steel shows up not only in the WPI, but it also gets reflected (as an intermediate product) in the prices of many consumer goods. 5. Unionization Prices in highly unionized industries must be controlled if an effective wage restraint program is simultaneously employed. Organized labor is extremely sensitive to the potential windfall profits that might result from wage restraint. In addition, unionization and the collective bargaining process itself may be a factor for cartelizing an industry, which would result in a tendency toward "administered" pricing. B. Major industry groups have been selected according to the recommended degree of price surveillance for each sector. However, the degree of stringency to which firms would be subjected would vary within each group; for example, some firms might not be required to make pre-notification of price increases. To begin with, industries might be divided into 3 groups, as follows: Group I Prenotification of price increases would be required for the largest firms in each industry. In addition, another tier of firms in each industry in Group I would be required to submit regular reports. Group II Prenotification by firms would be required in only a few selected instances; for most of these industries a number of the largest firms would be required to submit regular reports. Group III Selective reporting might be required in only those industries with some large firms. Recommendation Adopt a 3-part classification of industries according to the extent of price control stringency, and divide the industries along the following lines: 1) Group I.-Highest level of control Retail Trade Food Stores Largest retail chains subject to reporting and margin controls. Merchandise Stores Largest retail chains subject to reporting and margin controls. 3) Group III.-Low control, mainly non-reporting Manufacturing Printing and publishing Leather products (except shoes and luggage) Miscellaneous manufacturers Wholesale Trade Automobile Dealers (controlled by manufacturers) Other Retail Stores Services Hotels Personal Services Business Service Automobile and other Repairs Motion Pictures Amusement and Recreation Services Miscellaneous Services Eating and Drinking Places Finance, Insurance and Real Estate Special Problem Areas Rents Medical Care Possible use of committees to promote voluntary restraint. Note: A rough indication of the contribution of these sectors to price inflation can be seen from the relative weights of each group in the Wholesale Price Index and Consumer Price Index, as follows: |