spread forward through several months at the risk of causing longer term supply distortions. A crucial underlying consideration was whether export controls could be relied upon to lessen supply pressures resulting from shipments abroad of basic commodities. In the follow-up meeting on July 5, specific preferences were solicited as to different combinations of the options discussed the previous day. Dunlop directed development of a package to implement an option involving ceiling prices for meats, poultry, eggs, and possible certain other products, along with a loosening of controls on cereals, bakery products, and fruits and vegetables. This loosening would be accomplished by some modification of the fractional pass-through of cost increases every month. Analysis of Situation By the time of the meeting with George Shultz on the evening of July 6, the pressure of the schedule had forced the various ideas as to price regulations for the food sector to coalesce. In that discussion and in the ensuing White House meeting, the following production trends and prospects were presented: • Cattle slaughter, down 7% in the first half of 1973 from 1972 levels, was projected to continue at reduced levels; • Hog slaughter, in the second half of 1973 was projected to be about the same as a year earlier. It had been down 10% from 1972 levels in the first half of the year; • Broiler production was 1.5% lower in the first half and there was no prospect for an increase in the rest of 1973; • Egg production, which had been 6% lower in the first half, was projected to continue below the previous year in the remainder of 1973; Milk output was down 1.3% in the first half and there was no prospect for an expansion during the remainder of the year; Spring vegetable crops were down 1% from 1972 levels. The only bright note from the supply side was summer vegetable crops which were expected to be somewhat larger in the 1973 season. The price trends reflected this tight supply situation. Prices for farm products in June averaged 38% higher than a year earlier, with crops up 47%, grains up 89% and livestock up 31%. Food commodities were 25% higher in June and December. Margins between farm and retail prices had increased 6.1% from December to June. The result of all this by June, was a retail cost of a "market basket" of food 11.6% higher than December. The Council staff held out the following price prospects: a sharp rise in prices once the Freeze was terminated, because of substantial costs built into the food processing and distribution system; a 5% increase in the food-at-home component of the CPI during the third quarter if the Freeze were removed across the board. Worse yet, most of this increase was anticipated immediately upon termination of the Freeze. Finally, food prices at home were expected to advance on an average between 0.7% and 1.5% per month during the balance of 1973. The Proposed Price Control Program The proposed program presented to Shultz on Friday evening and the enlarged Quadriad on Saturday morning involved five elements: • First, export controls. Export limitations would be imposed immediately on corn and other feed grains for the balance of the current crop year, until September 30, 1973. Licensing and limitations on feed grains (including corn), soy beans and soy bean products for the entire 1973-74 crop year would be imposed if necessary to achieve one dollar and 50 cents corn and five dollar soy bean prices-the levels needed to encourage expansion of livestock production. These licenses would be issued on an annual basis. • Second, removal of import restrictions. Import quotas on nonfat dry milk would be temporarily eliminated until prices reached the levels called for by the dairy price support program. Other import barriers would be removed under the Import Barrier Suspension Act. • Third, the Freeze would be terminated immediately on non-meat agriculture products and increased costs for raw agriculture products would be permitted to be passed through on a dollar-for-dollar basis for 60 days. These costjustified increases would include only those costs associated with raw agricultural products; increases in other costs would be required to be absorbed. Each stage of the distribution cycle would be required to certify in its invoices that price increases above the June 8th Freeze price were so justified. The transaction rule would be changed to the act of sale rather than shipment. Finally, necessary flexibility would be provided by a self-execution of exceptions by a firm whose price was below its raw agricultural product cost. These exceptions would be limited to pass-through of raw agricultural costs above the level of January 10, 1973, as opposed to the June 8 Freeze base for everyone else. • Fourth, price ceilings on red meat and broilers would be continued for 60 days to moderate the post-freeze bulge. Continuation of the ceilings on broilers and eggs for 60 days was characterized as "optional." Some flexibility was to be provided by permitting adjustments for seasonal variation in the prices for different cuts of meat-a reflection of the earlier discussion of controlling beef prices at the carcass level. In addition, a small firm exemption would be granted for those firms with sales under $1 million (5% of sales and 50% of the firms) or fewer than 20 employees whichever was less. Finally, there would be a continuation of the posting requirement. • Fifth, food firms would be shifted to the same program as industrial and service sectors on September 12. This would involve termination of the meat ceilings, dollar-for-dollar pass-through of all direct and government mandated costs by product line, and the same prenotification, reporting and record keeping requirements as the industrial sector. In addition, 60-day prenotification for agricultural cooperatives (primarily dairy coops) would be required. The base price during the second stage would be the same as for the manufacturing and service sectors-the average price during the quarter most recently ended before January 11, 1973. Most of the discussion relating to the food sector in the July 7 meeting centered around the scope of the meat ceiling-whether the ceiling should include poultry and pork. The matter was not finally resolved by the end of the meeting and planning papers through the next week or so alternated between including poultry and omitting it. An additional issue which was discussed intensively in the July 7th meeting was whether the announcement of Phase IV should include explicitly a termination date for the meat ceilings. It was recognized that such an explicit announcement could cause beef ranchers and, to a lesser degree, beef processors to hold beef off the market until the ceilings were terminated. On the other hand, it was recognized that announcing a termination date could mitigate longer-term supply reductions because such announcement would relieve uncertainty. Further, in a perverse way, even withholding beef from the market in the short run could serve program purposes by (a) enhancing postceilings supply of beef and (b) making more traumatic, short-term supply distortions that would be identified by the general public as caused by the tough controls. It was decided to announce a termination date for the meat ceilings. Stage B Food The Phase IV food regulations evolved from two assumptions: the spiraling rate of price increase for raw agricultural products would continue; and the existing food price control tools were difficult to apply. The price increases have been documented in the text; the difficulties with the previous controls programs is addressed briefly here. The Phase II controls subjected food manufacturers to the general manufacturing regulations. These regulations required prenotification of price increases, quarterly reporting, and applied an annual profit margin test. The volatile nature of raw agricultural product prices resulted in a never-ending stream of prenotification requests, and a concomitant administrative nightmare for the food industry. Various approaches ranging from term limit pricing to volatile pricing authorization) had not resolved the problem. During the Spring and Summer of 1973, a Cost of Living Council team worked with the Food Industry Advisory Committee to find a new approach. The scheme they chose included many changes from the previous controls. The major change was that there would be, rather than prenotification, a gross margin control, developed from the gross margin rule to which firms engaged in the slaughtering and processing of livestock had been subject during Phase III. The rule was ideal for the food industry because it eliminated prenotification for volatile prices of raw materials, consequently reducing the administrative burden for the firms and the Council. The Council, however, decided that without prenotification, it was necessary for compliance purposes to require manufacturing firms to submit monthly reports for monthly compliance checks. The general retailing and wholesaling regulations already allowed for fluctuation in product prices. The only significant change from these general rules was that the gross margin base period would be either one of the last two fiscal years prior to February 5, 1973, rather than the last fiscal year, since the four quarters prior to February 5, 1973, had been extremely depressed for the retailing industry. Food service activities, of which there were few, were subject to the more generally applicable service regulations. Alterations after the Comment Process During the 15 days allowed for comments on the food regulations, the Council modified the original regulations. Numerous firms complained that the margin rule was not consistent with either the CLC forms or traditional business practices of the firms. In the initial regulations, price increases, due to increased costs for other than raw agricultural products, had to be prenotified. In the final regulations, the cost of raw agricultural products was treated the same as other cost increases. The Council also decided that it would alter the compliance period, though not the reporting requirement. The compliance period, originally monthly, was changed to quarterly with monthly reporting. It was agreed, however, that a monthly overage would not be excusable in the subsequent months, and that violations on a monthly basis, if noted in the quarterly reporting, would be prosecuted. In making two concessions to the food industry, the Council decided that food firms would be subject to the profit margin test whether they had raised their prices above the adjusted freeze price or not; this differed considerably from the other sectors in which the profit margin test was only triggered when an individual price of a firm was raised above the adjusted Freeze price. However, it followed directly from the Phase III and Freeze II food control mechanisms because food firms unlike most other firms-had been under mandatory controls throughout the period thus subject to the profit margin constraint. Finally, the Council changed the effective date of the regulations from September 11, at 11:59 p.m., to September 9, at 11:59 p.m. This change meant that the ceilings on beef prices would end earlier than anticipated, thus the subsequent confusion in the marketplace caused by this change would have a mitigating effect on potential speculative increases in the price of beef on the hoof. With respect to the food wholesaling and retailing industry, the only concession made was to allow a food wholesaler and retailer to treat as one category his entire food retailing operation at the pricing entity level. Because the pricing entity was defined to concur with traditional practice of the food firms, it was entirely possible for regional food retailers, who set prices at a regional level, to have a single category for all of its stores and for all of the products in those stores, rather than having a store-by-store pricing control or within a store, a produce control, a meat control, and a general merchandise control; unfortunately, this shift thwarted enforcement efforts and made consumer checks nearly impossible. This was adopted by the Council after much discussion; the compelling argument was that the action would soften the potentially great increases in some food prices because the firm would have enough flexibility to raise all prices moderately under the broader category in order to cover very large increases in its costs for individual products such as beef. Conclusion The food controls might have had greater impact in conjunction with export controls on raw agricultural products. But price controls by themselves could have only limited effect in the shortage environment of 1973. The concept of postreporting rather than prenotification made control and compliance difficult to achieve because information received by the government was 45 days or more out of date. However, the strains on the marketplace created by the alternative possibilities might have resulted in greater damage to the industry and the country. Petroleum By June 21, Charles Owens, in consultation with the White House Energy Office, had developed comprehensive recommendations for a system of price controls to be applied to the petroleum industry in Phase IV. The recommended program would involve a ceiling on the price of domestic crude petroleum, with periodic adjustment upward to achieve equilibrium between domestic and foreign crude prices. Increases over previous year's levels in crude production from each oil property would be exempted from the ceiling. Domestic refiners would be allowed to increase prices only to reflect, on a dollar-for-dollar basis, increased costs of imports incurred after May 15. Wholesalers and retailers would be permitted to apply their cents mark-up as of January 10, 1973, to the price certified to them of petroleum products. Retail sales of gasoline, no. 2 heating oil, and diesel fuel would be subject to a price ceiling which would be reassessed quarterly to determine any appropriate adjustment. These proposals were refined in the period that followed but formed the basis for the Phase IV petroleum regulations, which are discussed more fully in a separate paper. In the Freeze Policy Group meeting on July 4, John Dunlop explained the basic approach called for in the Owens memorandum and emphasized that he was not asking for the judgments of the Freeze Policy Group as to this aproach but merely informing them. The development of stabilization policies for the energy sector is discussed more fully in a separate working paper. PUBLIC COMMENT PROCESS For the first time in the history of the Economic Stabilization Program, a serious and comprehensive public comment process, designed to engage the support of numerous interest groups, occurred during the planning of Phase IV. During the twelve day comment period, 646 recommendations were received with late arrivals augmenting the total to over eight hundred. These comments, on and subsequent internal review of, the proposed regulations resulted in twenty major changes and fifty minor corrections. The minor alterations were documented in the preamble to Phase IV regulations placed in the Federal Register on August 9, 1973. In the subsequent pages the major changes are addressed. In some instances, to give perspective to the shift, the actual regulations are cited. Profit Margin Proposed, Effective, A firm engaged in manufacturing or service activities, or both, which charges a price in excess of base price may not, for the fiscal year in which a price in excess of the base price is charged, exceed its base period profit margin. A firm, which during its most recent fiscal year derived both (1) 90 percent or more of its annual sales or revenues from the sales of exempt items or from exempt sales and (2) less than $50 million of its annual sales and revenues from the sale or lease of nonexempt items, is not subject to a profit margin limitation for the next ensuing fiscal year. The profit margin test was made less burdensome through this change because, as proposed, a firm that had even one sale of a covered item would be subject to the profit margin test. Instead, Council analysis indicated that a 90 percent test and a maximum dollar test could equitably relieve firms engaged mostly in exempt sales (long-term coal contracts, agricultural products, etc.) from the test and its concomitant reporting requirements. Adjusted Freeze Price Proposed, Effective, Except as otherwise provided in this Part, no firm (including an individual) may charge a price with respect to any sale or lease of an item after August 12, 1973 which exceeds the base price (or other price authorized under this Part) for that item. Any price may be charged for an item which does not exceed the adjusted freeze price of that item or the base price of that item, whichever is higher. As proposed in July, a firm's base price was the average price charged in the last quarter of 1972. On the effective date of the regulations, August 12, all prices above that level would become illegal, even though they might have been legally charged during Phase III and the second Freeze. Some firms would have to roll back prices, and the giants of industry (those with more than $100 million annual sales) would have had to prenotify all their product lines whose prices were higher than the base price. While waiting for the 30-day prenotification clock to run-out |