Statement By The Price Commission

(Release No. 1, November 11, 1971)

The policies of the Price Commission announced herein are designed to achieve a goal of holding average price increases across the economy to a rate of no more than 2% per year. This is in line with the President's goal to stabilize the economy, reduce inflation and minimize unemployment, and with the Cost of Living Council's objective of reducing the rate of inflation to not more than 2 to 3% by the end of 1972.

These policies rely heavily on voluntary compliance, but they impose close supervision on those segments of the economy which substantially affect price levels. Specific regulations implementing these policies will be issued in the next few days.

Prices may not exceed their freeze period levels except as changed by published regulations or on order of the Commission.

The basic policy is that price increases will not be allowed except those that are justified on the basis of cost increases in effect on or after November 14, 1971 taking into account productivity gains. While price increases, in the aggregate, must not exceed 2% % per year, many adjustments will be below 22%, and some will be above 2% % as justified on the basis of cost increases and other factors. Price increases will not be granted to any individual or firm to provide retroactive relief for the impact of the August 16-November 13, 1971 freeze.

Release No. 1

Reporting procedures for price increases vary depending on the amount of annual sales or revenues reported by a firm in its most recent fiscal year.

(a) Firms with sales of $100 million or more must prenotify the Price Commission on proposed prices increases. Unless the Commission advises otherwise within 30 days after the notification is received, the notified price changes may take effect.

(b) Those firms with sales of between $50 million and $100 million must make quarterly reports to the Price Commission on changes in prices, costs and profits.

(c) All other firms are not required to prenotify or report on a regular basis, but will be subject to the standards and criteria that the Price Commission will establish.

Different economic sectors will be subject to different rules and regulations. These sectors are:

(a) Manufacturers;

(b) Wholesalers, retailers, and similar commercial enterprises;

(c) Service industries and the professions; and

(d) Others

Manufacturers

Prices charged by manufacturing companies may not be increased over freeze period levels, except as the following provisions may apply:

(1) Allowable cost increases in effect on or after November 14, 1971, reduced to reflect productivity gains will serve as a basis for price adjustments; and (2) Price adjustments shall not result in an increase in a firm's pre-tax profit margin (as a percentage of sales) as established during its base period. Retailers/Wholesalers

Retail and wholesale prices are to be controlled on the basis of customary initial percentage markups which are applied to the cost of the merchandise or service.

These customary initial percentage markups cannot be higher than those in the base period. Moreover, a firm may not increase its prices beyond that amount which would bring its net profit rate before taxes (as a percentage of sales) to a level greater than that in the base period.

Retailers are to post prominently their freeze period prices for all covered food items and for many other selected items other than food as will be specified in the regulations. Until all such selected prices are posted, retailers are not permitted to increase any prices. In any event such freeze prices must be posted no later than January 1, 1972.

Service Industries and the Professions

Prices charged for services may not be increased over freeze period levels except: (1) As a result of allowable cost increases in effect on or after November 13, 1971, reduced to reflect productivity gains, and

(2) In any event, price increases shall not result in any increase in a firm's pre-tax profit margin (as a percentage of sales) as established during its base period.

The Commission recognizes there is a multitude of different services industries, characterized by widely varying types of costs and market conditions, possibly warranting more specific forms of regulation. The Commission is considering more specific regulations.

Until the Commission publishes specific regulations for non-profit organizations and Governmental units, the prices of services supplied by such organizations may be adjusted for allowable cost increases in effect on or after November 14, 1971. Base Period

For purposes of these regulations, base period shall mean the average of any two of the past three fiscal years of the firm ending prior to August 15, 1971. Rents

Guidelines for rents will be developed after consultations with the Rent Board. In the interim, the freeze will continue with some rule changes amending freezeperiod definitions which resulted in hardships. Landlords are required to record and make available upon request both the unit-by-unit freeze period rent and the basis for any adjustments. The Rent Board will develop basic rent guidelines for consideration by the Commission.

Regulated Industries

For prenotifying firms the relevant regulatory agencies shall submit all existing and new requests for rate increases to the Price Commission. These regulatory bodies will also notify the Price Commission upon approval of rate adjustments which will be reviewed by the Price Commission. For reporting firms, the regulatory bodies will report approved rate adjustments for review by the Price Commission. The Price Commission will retain the right to implement more stringent standards.

Some regulated firms' proposed rate increases have been approved by regulatory authorities, but were not allowed to become effective because of the freeze. Such increases may go into effect; however the appropriate regulatory authority shall review increases for consistency with the goals of the Economic Stabilization Program.

Correction of Inequities

Inequities arising as a result of certain definitions and rules promulgated under the freeze or for other exceptional reasons will be handled as follows:

(1) Changes will be made to amend certain definitions and to correct inequities created by the operation of rules promulgated under the freeze, but none of these changes will permit retroactive price increases. On or after November 14, freeze-period prices may be adjusted pursuant to such changes. Specific price adjustments are subject to review by the Commission. In such cases, the Commission will determine whether the increase is significantly inconsistent with the goal of reducing the rate of inflation.

(2) Pre-notification firms must file with the Commission any proposed price increases based on the modification of freeze-period rules.

(3) Firms which can demonstrate a continuing gross inequity not ameliorated by the rules of the Price Commission may request an exception through local IRS Offices.

(4) Firms must retain records supporting price increases that are made pursuant to the modified rules, and reporting firms must file reports of these changes with the Commission.

Windfall Profits

Windfall profits refer to those profits which would not have existed except for unique conditions created by the operation of the Economic Stabilization Program. The Price Commission is determined to take those measures necessary to achieve the goal of reducing the rate of inflation to 2-3% by the end of 1972. Therefore, in the administration of the stabilization program the Commission will at certain times issue such regulations as necessary to cause windfall profits to be converted into price reductions.

Other Considerations

Notwithstanding the foregoing, in making determinations based on the standards set forth in this statement, the Price Commission will take into account whatever factors it considers relevant to an equitable resolution of that case and considers necessary to achieve the overall goal of holding average price increases across the economy to a rate of no more than 22% per year.

PHASE IV APPENDICES

PHASE IV PLANNING:

THE CONSULTATIVE PROCESS

The Phase IV Planning Process was characterized by two factors: (a) the relatively open nature of the process, both with respect to the number of government staff people involved and with respect to relatively candid consultations with groups outside the government and (b) speed.

Approach

At a Cost of Living Council meeting on June 15, both aspects were discussed. Most members of the Council expressed great concern as to the impact that the 60-day Freeze would have on an economy operating so close to capacity. Considerable emphasis was placed on planning Phase IV as soon as possible to permit termination of the Freeze before 60 days had elapsed. It was also generally perceived that the pressure for a tightening of a controls program had been political in nature; thus, considerable attention was given to the manner in which

the planning should take place. Before the meeting, the Council staff had prepared a "laundry list" of possibilities for consultation with interested groups. This document, intended to elicit as much wide-ranging discussion as possible, included, as possibilities: public hearings, solicitation of written recommendations, use of formal government and public advisory groups, meetings with Congressional leaders and trade associations. As to the character of consultation, the document identified two possibilities: a focus on specific questions, or an open ended request for recommendations and views.

Decision to have an Open Policy-Making Process

In addition to the usual attendees at the Council meeting, Herb Klein, Bill Baroody and others from the White House communications staff were in attendence. Some of those present expressed strong objection to any wide-spread public consultations, and argued that broad and public consultation would imply that the Administration did not know what should be done with respect to economic policy. Others countered that such consultation could build credibility for the program. In this view, a public hearing which aired the conflict between the views of consumers, farmers and businessmen would help educate the public, thus relieving to some extent the poor degree of public understanding about the nature of inflation and feasible government action to deal with it. At the conclusion of this discussion, George Shultz summarized it this way: There should not be public hearings, but there should be wide consultation with as many people as feasible within the time period, and such consultation should be focused. A consulted group should have a series of specific questions to address, rather than the broad issue of what to do about inflation.

Identifying Key Groups

Through the following week and weekend, John Larson, Hank Perritt, and the Executive Secretariat staff worked to identify key groups that should be consulted, to set up a schedule for consultations that would mesh with the substantive planning of Phase IV, and to prepare a series of questions to focus the consultation discussions upon specific issues that would have to be resolved before the new program could be launched.

The consultation plan was subjected to several internal revisions and presented, in summary fashion, at the Cost of Living Council meeting on June 25. At that meeting, the basic plan was approved; it was also agreed that members of the Council would meet independently with groups wishing to provide advice on the form of Phase IV and that such views would be channeled in writing by members of the Council through the Executive Secretariat into the planning process.

Telephone calls, letters, and telegrams went out from John Larson to invite participation in the various consultations and members of the Executive Secretariat staff were designated to record the results of the principal meetings. These results were compiled into a master summary that was circulated to members of the Senior Staff of the Council as well as the members of the Council.

The consultation process that preceded the formulation of Phase IV was more serious, more extensive and far more public than consultations which had preceded previous phases. The consultation process itself, and the subsequent commitment to release the proposed Phase IV regulations for public comment, reflected several motivations on the part of the Council staff. First, there was the perceived need for substantive advice on ways to make the regulations as workable as possible. This

alone might not have been enough to justify the application of substantial resources to conduct the consultations and process the comments, since it was believed -probably accurately-that equally good advice could be gained on an informal basis with individuals known to be especially knowledgeable and articulate. Second, it was recognized that compliance problems would probably be tougher in Phase IV than previously because of strong demand-pull forces which could impose severe strains on any stringent price control program. This caused the Council staff to want to elicit as much cooperation as possible from the regulated entities. Consultations would help do this by giving the parties consulted the feeling that their views had been considered. Third, consultations would expose the public to the existence of conflict as to the nature of the program, such as that which existed between militant consumer advocates and food industry spokesmen. Fourth, there was also a desire to open up the process of government as much as was consistent with the need for sound economic policy development.

Types of Consultations

The intensive concept formulation that took place over the weekend of June 24 sought to integrate three types of situations in which meaningful consultations could take place: specialized sessions with representatives of a particular sector of the economy; heterogeneous sessions in which conflicting desires could at least be exposed if not resolved; and newsworthy sessions aimed at publicizing the government's intent to be both tough and democratic. In addition, it was recognized that there would be many who wished to be consulted who nevertheless had little to offer that could not be gained more efficiently through other channels. The Council staff determined to concentrate its resources on those types of consultations which it identified as most useful, while enlisting the services of the Cabinet Officers who were members of the Cost of Living Council to consult with special interest groups who demanded participation.

As to the efforts of the Council staff itself, two types of consultation meetings were called: meetings outside Washington, originally conceived as highly publicized, heterogenous sessions at which conflict of desires could be exposed; and a larger number of Washington meetings aimed at eliciting separately the views of important interests and economic sectors. In implementation, the ideas became somewhat mixed. Two of the five regional meetings were homogeneous in character -the wholesaler retailer meeting in Chicago and the wholesaler meeting in Montreal. Originally, it was planned to include representatives of consumer interests in the regional meetings. In fact, only the San Francisco and New York meetings included consumer representatives. In the other area meetings suitable consumer advocates could not be identified.

The San Francisco and Atlanta meetings proceeded in accord with the model developed during that weekend for regional consultations; the other regional meetings tended to develop in an ad hoc fashion under the pressure of events. In both of the more carefully orchestrated sessions, a highly respected businessman in the region was asked to identify participants and personally invite them on behalf of government. In San Francisco, David Packard was an obvious choice because of his stature in the business community and his familiariy with the administration. The Atlanta session was organized by Ed Smith, Chairman of the First National Bank of Atlanta, who had been identified as a man of great stature and yet relatively nonpartisan. In both cities, the staff adhered to the view that decisions on whether or not to include a particular individual resided with the host. This was helpful in resisting pressure to make the meetings larger and larger,