At least two spurious criteria for evaluating compliance programs should be set aside at once. First, a program to enforce regulations is not necessarily effective if an enormous number of violations are identified and a number of violators caught and penalized. It does not help to know how many wrong-doers were nabbed without knowing how big they were and how big their violations were. A magnificent record in stopping traffic violations and apprehending shoplifters does little to alleviate crime in a city if murder, rape and mayhem are still increasing. Second, a program to enforce price regulations has not necessarily been effective if the general rate of inflation has plummeted. If a depression were to intervene and deflate the economy after price controls were imposed, strong enforcement would be superfluous. In other words, there is no necessary cause-and-effect relationship between extensive enforcement of price rules and price restraint by those who are regulated. There can be such a connection, but it must be demonstrated. Conversely, an enforcement program has not necessarily been ineffective if the general rate of inflation has continued to skyrocket. If the marketplace is tormented by serious commodity shortages in the face of expanding personal consumption, prices may go right on rising however tough the enforcement program.

These spurious criteria ignore potentially important macroeconomic conditions that, while not constraining a militant enforcement effort, will limit its translation into restrained prices and wages. This narrative on compliance and enforcement does not examine the external effectiveness of price and wage controls; rather, it examines the inherent operability of the compliance and enforcement programs meant to support those controls. Enforcement is essential to a regulatory program-that much we know for sure. Therefore any assessment of the program's enforcement system will contribute in a major way to an understanding of the entire program.

I. COMPLIANCE POLICIES

COMPLIANCE OBJECTIVES

No policy governing an organization's program of action springs fully grown from abstract concepts, like Athena from the head of Zeus. If a new organization, like the Cost of Living Council (CLC) at its inception, is struggling to establish a program like the Economic Stabilization Program with little benefit of prior planning, policies with far-reaching consequences are likely to develop in response to the need for specific actions and decisions. Such was the adventi

tious origin of the policy of "voluntary compliance," the guiding concept and familiar refrain among policy-makers who shaped the compliance and enforcement system through successive phases.

The Administration's decision not to erect a large bureaucracy to administer price controls seemed in August, 1971, to be the crucial circumstance forcing the Program to rely on voluntary compliance with mandatory controls. However, "what appeared to be a discretionary policy was an accommodation to the only real course that was open," according to Arnold Weber. Ad hoc regulations, along with severe time limitations and other physical constraints on the program, are evidence that broadly based, nationwide compliance with wage and price rules would have had to be voluntary, regardless of the Administration decision.

While Stabilization policy-makers never seriously doubted that most firms would comply voluntarily with Phase I and Phase II regulations, from the outset they felt a responsibility to do more than merely administer a set of rules and to encourage compliance actively. All actions meant to bring violators into compliance were, in the common parlance of the Program, "compliance actions." Many such actions were undertaken by organizational units other than offices of "compliance and enforcement"; the incongruity caused confusion between the abstract sense of the word "compliance," denominating the relative state of obedience to regulations, and the practical sense which describes a program function of one or more Stabilization offices. When the Office of Program Operations of the Price Commission (PC) issued a remedial order to a firm, entailing price rollbacks or refunds, the effect of the order would be to bring the firm "back into compliance." But a remedial order was never understood to be a "compliance and enforcement" (C&E) function, because it was issued by the same operating component that reviewed the filings submitted by firms. Nor was that component the same unit which directed IRS investigations and tried to develop litigable cases.

Certainly, a large proportion of all price and wage violations which were detected and corrected in the course of Phases I through IV were first spotted in filings. At least for a while, the existing base of voluntary compliance was bolstered by an awareness among the reporting firms that reporting deviations would not go undetected. In that sense, the Price Commission Office of Program Operations in Phase II, the Pay Board Office of Case Management and Analysis in Phase II, and IRS in Phase IV contributed significantly to voluntary compliance by the forms review function. Yet that function was not recognized as an element of "compliance and enforcement.” The dispersion of compliance functions outside the C&E units not only makes it difficult now to reconstruct and make sense of the totality

of Stabilization compliance activities, but actually frustrated compliance strategists while the Stabilization Program was in progress. As late as December 7, 1973, in a memorandum addressed to CLC's Associate Director for Operations, a staff aide lamented the lack of a satisfactory definition of compliance, conceding that "in Phase IV, confusion over the compliance function still exists." 3

The thicket of semantics could have been pruned had "compliance and enforcement" functions been known merely as "enforcement functions," for that in fact is what they were. The central objective of C&E, throughout the program, was to find price and wage violators and bring them to Justice (literally and figuratively). In rather Kafkaesque language, the Stabilization Program Quarterly Report for the period April 1 through June 30, 1972, observed that “along with voluntary compliance, a credible controls program must have some involuntary compliance...", which it then equated with "enforcement litigation." That is, firms which might not comply spontaneously with regulations would, if they saw evidence of enforcement, then comply "voluntarily." Logically, the C&E program had two distinct purposes: by 1) deterring would-be violators, enforcement would, indirectly, 2) establish the credibility of mandatory controls among all firms.

An IRS investigation was the operational vehicle for obtaining evidence against a violator who failed to file reports with a Stabilization agency. The "stuff" of the enforcement process, then, was the selecting, conducting, and completing of investigations. Questions about what kinds of firms would be investigated, how many firms would be investigated, and what penalties would be imposed if violations were detected, were tactical considerations that influenced the development of C&E strategies undertaken during the various phases.

Voluntary compliance, and the complementary aim of apprehending violators in support of that compliance, were invoked from time. to time in correspondence and meetings between personnel of the Stabilization agencies. Generally, though, little explicit analysis was performed by the Cost of Living Council or any other agency in the early months of the Program to articulate the objectives and strategy behind enforcement actions. Occasional memoranda, rationalizing specific enforcement activities, spoke of the "conceptual approach" or "goals" behind those activities; all too often, however, such objectives were derived after the fact, and were not used in shaping and directing actual programs. Despite a few instances of genuine planning, such as CLC's Compliance Monitoring Strategy (developed with the help of American Management Systems in Phase II) and the "umbrella strategy" in Phase IV, most enforcement actions during the Economic Stabilization Program were primarily responses to

exigencies of the moment, only secondarily the result of strategic planning by C&E units.

COMPLIANCE STRATEGIES

On December 3, 1971, CLC's Assistant Director for Operations Review, wrote to both the Chairman of the Price Commission and the Chairman of the Pay Board on the subject of compliance monitoring. He observed that compliance was a "critical element" of the Program, endorsed the idea of a "strong compliance monitoring strategy," and asked the two chairmen to send representatives to a new Compliance Coordination Group which would thereafter exercise policy guidance on compliance matters. Nodding in the direction of the voluntary compliance concept, he called it a "fundamental operating principal" that the Program had to sustain by demonstrating "effectively and visibly" that firms were complying. With that memorandum, written two weeks after the beginning of Phase II, began a sequence of sporadic attempts to refine strategies for compliance operations in the controls program.

Phase I Strategies

Little strategic planning for enforcement actions was accomplished, apparently, in Phase I. Arnold Weber, Director of the Cost of Living Council in that ninety-day freeze, has indicated that the Council's posture was to "do something" to act aggressively in filing litigation without any certainty that it would succeed in court, and in general to project a tough image which would quickly confirm the credibility of the program in the public's mind. Apart from the theatrical aspects of Phase I enforcement efforts, the IRS disposition of the 46,387 citizen complaints received during the freeze was the main context for specific enforcement activities. Of the large influx of Phase I complaints, IRS found only a few hundred meriting some degree of investigation, while a mere 37 eventuated in cases referred to the Department of Justice for litigation. Weber believes that a "positive record of compliance" was achieved in Phase I, and that it was due largely to the favorable public response to the Freeze on prices."

However, by September 1971, doubts about the credibility of the freeze began to appear in the press; this prompted CLC to arrange a program of IRS spot checks to heighten the threat to violators that they might be discovered. Before September 21, IRS investigations had relied on complaints for information about suspected violations. In the first week of spot checks in Freeze I, 7,254 checks were made of which 308 showed violations, and 63 resulted in enforcement action to restore compliance.

During that month of the freeze, the office of CLC's Deputy Director began to experiment with the use of price indices (obtained from the Department of Commerce) to identify sectors of the economy where price increases persisted despite the freeze, and in which IRS investigative time should be concentrated. This was, at least in conception, somewhat more sophisticated a strategic approach than the usual follow-up on complaints; it was motivated as much by a desire to balance the restraining effects of the freeze between sectors of the economy, as it was part of a general effort to intensify voluntary compliance. However, there was not enough time to fully implement the new strategy. Index-targeting did not, in the end, have a major impact on compliance activities at the field level during Phase I. In fact, those activities were not significantly more or less offensive in posture at the end of the freeze than at the beginning. But the experiment shows that as early as Phase I, CLC policy-makers recognized that more systematic methods were available for selecting investigation targets than mere automatic response to public complaints.

Phase II Stategies

The CLC memorandum of December 3, 1971, on the subject of "compliance monitoring," indicated that CLC had asked its support contractor, American Management Systms, Inc., (AMS) to assist in developing "alternative compliance monitoring strategies." AMS's contribution was a series of working papers and proposals, which were circulated to various offices in November and December, 1971, and in January, 1972. The first such paper, "Review and Evaluation of Major Compliance Monitoring Issues and Problem Areas, November 30, 1971," picked up where the Phase I experiment in index-targeting had left off-with the idea of targeting. "The key to to an effective monitoring system, the AMS paper declared, "is an overall targeting strategy." The very need for a strategy at all, it pointed out, was a recognition that program resources were scarce. Not coincidentally, every subsequent attempt in the Stabilization Program to develop some semblance of a strategic approach to enforcement actions depended on a targeting mechanism-a set of criteria to be used in selecting firms and industries for IRS monitoring or investigation.

Not to be overlooked in the December 3 memorandum and the AMS working papers, are the references to compliance monitoring. Though it was never explicitly acknowledged or perhaps even understood at the time, "monitoring" is not the same as "investigating". To investigate a firm is to look in its records for evidence of suspected