We should have wage and price control immediately. You say where prices and wages are set by the market rather than by corporate and union power there is no need to continue the freeze. That means, is that all retail prices, farm prices, all wages not covered by collective bargaining controls

Dr. GALBRAITH. That should be contracts.

Mr. MIZE. Yes. All prices of firms employing fewer than 100 or more people, even a thousand should be released from control. Do you mean by that every wage and price should be frozen immediately, but after a 6-month period retail prices, farm prices, and so forth

Dr. GALBRAITH. I would do it for the 6-month period. I would put in the freeze for the sake of firmly establishing the proposition that prices in general aren't going up any more. Once that is done, and aggregate demand in the economy is reasonable-if too many dollars are not chasing too few goods-we do not currently have too many dollars chasing too few goods-then you don't have to control prices and wages where there is no market power.

Mr. MIZE. I was glad to see you point out that some of the recent unemployment has been in the aerospace industry and the defense industries. You very kindly point out that we should not criticize the administration for unemployment because after all the American public wanted cutbacks in space and defense. You point out correctly that unemployment is now 5 percent of the labor force and probably higher. I have the deepest sympathy for areas like Seattle because of the cutbacks of Boeing; unemployment in southern California_because of the cutbacks in the aerospace industry; Marietta, Ga.: Wichita, Kans.; Florida, around the Cape Kennedy area, but I know that you are aware that this unemployment is very spotty. In my district the unemployment is less than 3 percent. We have hiring signs over an awful lot of our industry out there-Goodyear, one of the largest plants: Rockwell's big steel foundry in Kansas can't possibly get the people they need.

My last question: Would you prognosticate what President Nixon is going to tell us tomorrow at noon?

Dr. GALBRAITH. Well, despite the association with which Representative Reuss dwelt upon with such kindness and

Mr. MIZE. Delicacy.

Dr. GALBRAITH (continuing). Delicacy and at such length. I haven't been in close association with the President on economic matters. He would be surprised were I to emerge as his advance spokesman.

Mr. MIZE. I think that is very fair. Thank you, Mrs. Sullivan.

Mrs. SULLIVAN. Mr. Ashley.

Mr. ASHLEY. Thank you, Madam Chairman.

Mr. Ambassador, do you think we have shifted from a situation in which demand several years ago was largely an aggregate demand that has given way to an inflation resulting now from administered wages and prices?

Dr. GALBRAITH. Yes, I do.

Mr. ASHLEY. And that presumably is why you are more emphatic today with your opinion on the imposition of controls than a year ago or 18 months ago?

Dr. GALBRAITH. Yes. I have long felt, Congressman, that if we were going to balance out the economy at close to full employment with osonable price stability, we needed a limited system of con

trols on the wage price bargain. We needed the kind of social contract which Congressman Reuss mentioned. I might mention that the concept of the social contract goes back to Prof. John R. Commons of the University of Wisconsin. So it is not surprising that Congressman Reuss should be using it.

I have long felt this was a necessary part of the strategy of maintaining prices and full employment. But we see the urgency of it at the present time because of the nonadministered prices-to use your phrase are at the present stables, even doing down.

Mr. ASHLEY. On pages 4 and 5 of your statement you say that within the framework of its approved measures, monetary and fiscal policy, there is nothing that administration can do, "To tighten up sufficiently on money and the budget to end inflation would, we now know, require a very serious recession."

It is my understanding that the Federal Reserve policy until quite recently has been restricted to the point that we have had essentially a zero increase in monetary expansion and credit expansion, but that in more recent months it has been eased I believe to between a 7- and 9-percent increase, but there are now reports that it is deemed necessary to again restrict the increase in credit if inflationary pressures are not to be furthered. Are you familiar with this theme?

Dr. GALBRAITH. Yes.

Mr. ASHLEY. Is this essentially what worries you, the necessity of the Fed pursuing a more restrictive policy than at the present time? Dr. GAILBRAITH. Well, if they continue the present policy with the present level of interest rates, they are tolerating the greatest inflation since the years immediately following World War II, and they are combining this with a declining output and a rising level of unemployment. If they tighten that policy they make unemployment worse. If they ease it, they will have more inflation. This is the trap in which they find themselves.

Mr. ASHLEY. Is it your understanding as it is mine that it is their intention to revert to a more restrictive policy in terms of credit than in the past immediate months?

Dr. GAILBRAITH. With the election coming on an easing of monetary policy would certainly seem a plausible action. But that means that they will have to take a higher rate of price increases. The effect of the general measures in restraining inflation will be lessened.

Mr. ASHLEY. I have just two short questions if I may, Madam Chairman. On page 7 you say prices and wages are set by the market rather than by corporate-there is no need to continue the freeze. That means all retail prices and farm prices should be released from control, and so forth. Isn't there a distinction to be made between wages and prices at the commodity level in agricultural products, and wages and prices in the food processing industry which take these raw materials and turn them into the foods offered to the public at the retail level? It would seem to me there certainly would be many firms particularly in the processing and retailing of food that would be included in the 100 or 1,000 firms that you suggest.

Dr. GALBRAITH. That is entirely possible.

Mr. ASHLEY. Finally, you say 6 months should be available for working out with the corporations and the unions a more permanent ystem of restraint. I am not sure I entirely understand why 6 months.

I certainly don't understand fully the more permanent system of restraint. You alluded to the possibility of compulsory arbitration or something of that kind, didn't you?

Dr. GALBRAITH. No. The 6 months is arbitrary. I took that from Mr. Roosa, as a matter of fact. If I had to say why it should be 4 months or 6 months, rather than a year, I would have some difficulty.

Mr. ASHLEY. What happens during the time period?

Dr. GALBRAITH. During those 6 months, one does two things. One, first of all, irons out all the inequities in the wage structure that are a result of the particular timing of the freeze, the fact that some union gets frozen at the end of its contract period. This sort of thing has to be worked out. Beyond that, one works out jointly with labor and management to establish the improvement factor that can be allowed within a framework of stable prices. This becomes the rule that one adheres to from then on. I would like to be quite frank about one thing: I think if we are going to have full employment, stable prices, we must have some system of wage and price restraint on a continuing basis. That is the lesson of this recent flirtation with the free market, it doesn't work.

Mr. ÁSHLEY. Yes. I think I begin to see what you mean by continuing the system of restraint on both wages and prices. I do wonder who would be the umpire in such a system?

Dr. GALBRAITH. There is no doubt-it is the Government.

Mr. ASHLEY. And whether this wouldn't, in effect, lead to compulsory arbitration?

Dr. GALBRAITH. It is possible compulsory arbitration would have to be used on occasion here. I wouldn't exclude it. There is no question as to who the umpire is, the Government has to be the umpire.

Mr. ASHLEY. Thank you very much.

Dr. GALBRAITH. This is a system which puts added power in the state, let us not duck it, it does.

Mr. ASHLEY. I find myself in very substantial agreement with you. I just think we want to be perfectly clear on these matters. Thank you. Mrs. SULLIVAN. Mr. Blackburn.

Mr. BLACKBURN. Thank you, Madam Chairman. I appreciate your candor in saying you always felt some form of wage and price controls were necessary. I was going to begin by asking you if there had ever been a year in which you didn't favor wage and price controls. Apparently, you think this is a permanent thing we need in our economy, is that so?

Dr. GALBRAITH. Yes. If you are going to reconcile price stability with high employment, which I believe most people want, you are not going to accomplish it by prayer, and it is not going to be accomplished by speeches about the market, and it is not going to be accomplished by Milton Friedman. It is only going to be accomplished by doing something about it. We are adult people, we should face the consequences. We should not deny that this means a larger exercise of public power.

Mr. BLACKBURN. I think we also look toward a productive society. Certainly our economy is on a par, if not above the economic well-being of other economies.

Dr. GALBRAITH. I thoroughly agree with you and this is one of the reasons for my recommendation. The present policy has given us declining production for a great many months. So I welcome your supon that score, too.

Mr. BLACKBURN. What I am trying to say is that our economy has been a free market economy essentially and those controlled economies have never been able to match our performance. So I am not so interested in dialog as I am in performance. Performance has certainly been above that of controlled economy. I am certainly amazed that someone should say we should move toward a controlled economy.

Dr. GALBRAITH. I would amend only one point. I would say that the control that we are talking about here really substitutes public control for what is now the private control by the corporations and unions. So that one is really changing one form or control for another. And while the productivity of the economy would be increased, the degree of control will not be substantially altered as it passes from private to public authority.

Mr. BLACKBURN. Let me first answer one of your observations, that the present policies have reduced our productivity. I think that is true. That is one of the purposes of our present policy. I don't like it, but that is one of the peripheral disadvantages of trying to combat inflation. You admit yourself that if we did have the power to immediately freeze all prices and all of the wages in the country-and of course, we are a Government of men and not of God—so if the man in the White House himself were to stand with you at his side and announce from henceforth and forever after there will be no increases in wages or prices for at least 6 months, the only way he can enforce that is with some police machinery. If the President were deluged with 50,000 complaints the week afterward, that prices were raised on a great myriad of things that we sell in our economy, it is going to mean the establishment of a very vast police machinery to control it.

Now, it is easy to say, let's freeze wages and prices, but what about the machinery necessary to enforce that freeze.

Dr. GALBRAITH. I have dealt with this previously, I do not think that the enforcement machinery would be all that difficult. As I said I would get rid of all the market controlled prices and all wages not covered by collective bargaining agreements. You don't have to worry about the individual farmer's prices. He can't raise his prices. He has to take what the market gives him. You know that as well as I do. So you are left with a manageable number of collective bargaining contracts and manageable number of corporations. For this you don't need a vast organization.

Mr. BLACKBURN. Let me inject this question at this point

Dr. GALBRAITH. Let me say just one word. I would hope, Congressman, you wouldn't want to describe the unemployment that comes from the present reduction in production, the present effort to pursue stability as wholly peripheral. When a million people lose their jobs I would like to persuade you that this is not a purely peripheral effect.

Mr. BLACKBURN. I was not describing unemployment as being peripheral. I was saying the loss of production was one of the peripheral losses that we have to suffer with. I am just as concerned about unemployment as anyone.

Would you suggest that there be some curbing of power on the part of the unions or management? You have the monopoly union power. Do you feel that perhaps a combination of business enterprises also constitutes some form of business monopoly?

Dr. GALBRAITH. Well, there is an old economic formula that a great many economists have adopted, they say: Sure, unions have the power

to shove up prices, they have the power to get wage set limits that are a threat to prices, and corporations have the power to shove up prices which then invite union demands. The proper action is to cut loose with the antitrust laws-break up the unions, break up General Motors, and so forth. I regard this as pure romance. It isn't going to happen. Since I like to be practical, associate myself with things that should be done, I reject such nonsense out of hand. There is a function for the antitrust laws but they do not serve any purpose in this area.

Mr. BLACKBURN. When you say it is not going to happen as regards the breakup of big power, whether business or labor, you mean as a matter of practical politics?

Dr. GALBRAITH. That is right.

Mr. BLACKBURN. You are not arguing an abstract theory that a breakup of monopoly power in business or labor might not be desirable.

Dr. GALBRAITH. In the American economy about half of our production comes from 1,000 large corporations. The country doesn't suddenly one day decide that half its economy is illegal and break it up. Since I consider this unlikely to happen, I am not going to advocate it as a solution.

Mr. BLACKBURN. One of the theories that many of us have considered is the need for some form of credit control, particularly in the growth of commercial paper, which seems to be the principal source of funding the continued business growth at the present time.

I recall some figures, bank reserves dropped almost half while commercial paper doubled during the same comparable period. Have you given any thought to that?

Dr. GALBRAITH. I am not really an expert on that. I am sure there are some marginal effects that are to be accomplished by these kinds of credit adjustments, but I don't regard them as getting to the heart of the problem.

Mr. BLACKBURN. I have no further questions at this time. Thank you, Madam Chairman.

Mrs. SULLIVAN. Mr. Moorhead.

Mr. MOORHEAD. Thank you, Madam Chairman.

Doctor Galbraith, I say that your testimony is not only informative but literate and enjoyable to listen to. I enjoy having you as a witness before this committee. As you know, the bill we are considering is the Defense Production Act extension. Do you want to make any comments on the use of this act in the Penn Central situation?

Dr. GALBRAITH. I hadn't thought about it until Chairman Patman mentioned it this morning so that my comments can hardly be called mature.

I have some reaction to the assumption that lies behind the Penn Central problem. That is the assumption that great increases in efficiency are to be gained from these mergers. Part of the case for the conglomerate explosion was the scarcity of industrial genius in the United States. Accordingly combining an airplane manufacturer with a pay toilet magnate and the two of those with a banana company, you could make that genius available to all of them. What you got was management demoralization-some diminution of efficiency. Individual units of firms like Link-Tempco-Vought frequently did worse after they were brought into the company.