able as may be the prospect, there must be a search for a new line of policy. This new line of policy must be actual not oratorical, honest, not fraudulent. Those of us who have long argued that monetary and fiscal measures are insufficient can better aid this process, and do more to ease feelings generally by welcoming the redeemed sinners than by praising our own prescience. However, a certain number of the redemptions to date are of men who seem determined to pass from a wrong policy to a fraudulent one.

That, for example, tempers my own applause for the somewhat belated conversion of Dr. Arthur Burns to the belief that wage and price relationships are important for inflation.

Specifically the newest fraud is to say that wage price interaction causes inflation and that we must recognize this fact and then having established this fact to say that we must carefully do nothing about it and that we can call the resulting inaction an incomes policy. The front page of the Washington Post today has a surprisingly candid comment of this. A high official of the administration, is quoted, as saying, that if the President in his forthcoming speech leans, to a mild form of jawboning-notice the distinction between strong jawboning-it would be, he said, "to make people feel better, not because the President placed great faith in the potential effectiveness of such a policy."

I would suggest, Mr. Chairman, that if one is really suffering from unemployment or increasing prices, trying to live on a fixed income as a retired person, that this is not going to make them feel all that much better. This is a remarkably fraudulent approach to a very serious problem.

Indeed, I should like to suggest that the time has long since passed for such escapism.

If the economic problem is serious, and it is, the responding action must be serious. Wage claims now in prospect provide for the present inflation the expected increase in inflation, a safety margin for unexpected inflation and beyond that for a hoped-for increase in real wages. These wage claims will be disinflated only if there is a firm promise to the unions of price stability. Nothing can now be accomplished by the most massive deployment of public oratory, whatever the added component of mild jawboning, strong jawboning, billingsgate or old-fashioned competitive hog calling. Nor are these dignified devices for conducting the affairs of the modern State. Nor do they become either useful or effective by calling them incomes policy, which is the present fashion.

The proper course is, under legislative authorization, as this title recommends, to freeze all prices and wages as of some recent date. I think, myself, this should be for a period of about 6 months, as Robert Roosa the former Under Secretary of the Treasury and now of Brown Bros., Harriman & Co. has recommended.

This assures all concerned that the spiral, the wage price spiral has been brought to an end. Where prices and wages are set by the market rather than by corporate and union power, there is no need to continue the freeze. This means that all retail prices, all farm prices, all wages not covered by collective bargaining contracts, all prices of firms employing fewer than 100 or possibly even 1,000 workers should be promptly released from control. The point is important and I would

like to stress it. Where neither corporations nor unions have power to shove up prices and wages, the Government, obviously doesn't need to prevent the shoving. That is what we are concerned with here. Some of these prices and wages will rise, and some of them will fall, but that will be in response to a market decision.

One needs to control through public action those prices and wages that are subject to strong private control.

The 6 months should be used in working out with corporations and unions a more permanent system of restraint. Here I depart in my recommendation more than slightly from that in the legislation. This includes the elimination of inequities resulting from arbitrary imposition of any freeze. Different unions in particular will be caught in various contractual states in their bargaining and the difference between a union that has just completed bargaining for a wage increase and one that has not yet got it is indefensible. This sort of thing will have to be ironed out. There will have to be provision for the further wage increases that can be tolerated that are consistent with expected gains in productivity and therefore not damaging to price stability. From this stage on we should notice that the wage increases that the worker gets will be real. If the policy is to be equitable and even defensible there must also be provision in industries of exceptionally high profits for either price reductions or surrender of excess profits. One cannot have a policy that holds wages in line but does nothing about such profits.

I would also suggest that executive salaries should also be frozen and it would be good for the Congress to suspend the unfortunate bonanza which the last tax bill gave to earned income, as it is called, in the upper executive salary brackets.

Needless to say, all of this action needs to be combined, as Congressman Reuss said, with a speedy liquidation of our adventure or misadventure in Indochina. This is necessary to restore confidence and our reputation for good sense. I would, of course, be opposed to a price control policy that was for the purpose of fighting this war more efficiently.

Once prices and wages are under control, interest rates can be drastically reduced. These interest rates now include a large percentage for expected inflation. Then one sees an interest rate of 10 percent, 6 or 7 percent of that is for the expected increase in prices during the coming year, only 3 or 4 percent is for interest as we commonly think of it.

Especially as the end of the war comes in view, a modest deficit in the budget could also be tolerated. We notice that the end of the war would also release resources for the urgent civilian use and relieve pressures there. Price and wage controls are not pleasant. Life often involves a choice between unpleasant alternatives. There is no reason why economists should be spared.

The limited controls that I have advocated paralleling those in the second title of this bill will not be pleasant to administer-the administrative problem must be taken seriously. But these controls, when the public interest is weighed, are by far the least unpleasant, by far the most practical of the various courses of action available.

They should not require a vast administrative organization in this limited form. One should notice that only a few hundred collective

bargaining contracts and a few thousand larger corporations will be under surveillance.

Corporations can be accorded freedom for individual price adjustments within a general level of return. There are other simplifications * of the same sort that are possible. Let me point out again that all one is concerned with here is stopping the gross spiral of large wage increases and large price increases to cover them. We are not concerned with establishing precise price stability.

For all of this, no great organization is needed. A few hundred people would suffice.

It is worth bearing in mind that it is comparatively easy to fix and keep surveillance over prices that are already fixed. That is true of the prices of steel; it is true of the wages in-say-the steel workers' contract. Still, I do not want to minimize the task. It requires much more effort than doing nothing. But public officials are paid to work and try harder, especially where it saves in public suffering. My friends in the administration will have spared themselves the need for making those endless and terrible explanations as to why inflation continues, unemployment increases, but nothing should be done.

With these actions, limited control, easier interest rates, a greatly lessened reliance on monetary policy and, of course, liquidation of the Indochina mistake, the economic crisis will be largely over. There is nothing about our present economic situation that is unmanageable. Our trouble lies in the effort to manage the economy without having recourse to the obviously relevant remedies. If the results of this effort are bad we should not be surprised.

Mrs. SULLIVAN (presiding). Professor, you have given us very interesting testimony, spread through with your seriousness and humor. I have a few questions to ask.

Professor Galbraith, outside of money for such things as housing, or for any other purpose, at reasonable rates of interest, what is scarce enough to make price control work effectively?

Dr. GALBRAITH. Well, scarcity, Madam Chairman, is not I think the decisive factor. The decisive factor is that we have within the price system great corporate power. General Motors, Ford, Chrysler have extensive power over the prices they charge for automobiles, which they exercise in conjunction with the prices charged by the big foreign firms. And the UAW has extensive power in bargaining for wages. It is this interaction of prices and wages, not scarcity which is the source of the inflationary pressure.

Mrs. SULLIVAN. If you are going to set ceilings at the highest level prices have reached, all you are saying is that they just simply can't go any higher. But a price control program at this stage could not roll back prices or wages, could it?

Dr. GALBRAITH. I don't think so. I think you are quite right on that. At various times in the past rollbacks have been talked about but it is a hard thing to do. I certainly wouldn't recommend it. I do think there needs to be some provision for the special case of the industry which is making very high profits. Here it is very hard to tell the union, "You stay within the guidelines while the profits remain at these levels." The answer is to do one of two things. Either have an excess profits tax as Congressman Reuss has urged at various times in the past or have a provision for passing some of those profits on to the

public in the form of lower prices. That is the only exception to acceptance of past prices I would make.

Mrs. SULLIVAN. Your experience during World War II was in the price-setting part of it, I believe. But all of the uproar these days about the cost-push inflation is directed at wage rates. How big an organization would be needed to pass on all of the wage contracts coming up for renewal to adjust them to what is a fair level compared to contracts recently negotiated and what would you have to do about executive salaries and policeman's pay and everything else where the fellow may have been left behind on the so-called wage inflation? Dr. GALBRAITH. Well, you have asked several questions.

I do not believe the organization would have to be large. As I said in my testimony, I think 200 or 300 people could take care of it. One has only a few hundred major collective bargaining contracts each year. Once those are set the minor ones would tend to fall in line. One is dealing with only a few thousand corporations.

I deliberately got rid, you see, of all the wage bargainers not covered by the collective bargaining contracts, and all of the prices where there is no corporate market power.

As to the executive salaries I would urge that there be simply a freeze on executive salaries. Better still, would be repeal of the very bad provision of the last tax act reducing their maximum tax to 50 percent. This was an outrageous bonanza. Whoever sold the Congress on the idea that corporate pay of half a million dollars a year was earned income was really too good a salesman.

Mrs. SULLIVAN. Now we get to the policeman's pay and everything else where the fellow may have been left behind on the so-called wage inflation, where they haven't caught up.

Dr. GALBRAITH. I wouldn't control those. I do not think there is any danger of any municipality in the United States overpaying its public employees. I wouldn't control those wages at all.

Mrs. SULLIVAN. Now, I am a firm believer in having standby powers to control any price or wage or salary or rent or profits or anything else in a real emergency. We have tried this ever since the expiration of the controls back in, I think, 1954. We have gotten nowhere. I was instrumental in starting the ball rolling for the credit controls we enacted last December over President Nixon's opposition. But he won't use those controls. He has indicated himself that he doesn't want and won't use price or price-wage controls. Of the two types of controls, credit controls or price and wage, which do you think would become more effective right now in easing the inflationary pressures?

Dr. GALBRAITH. The controls that I have urged here this morning by

all means.

Mrs. SULLIVAN. The price-wage?

Dr. GALBRAITH. Yes.

Mrs. SULLIVAN If you were the price administrator under this bill we are considering, what would you do first insofar as reducing inflationary pressures are concerned?

Dr. GALBRAITH. I would first, Madam Chairman, put into effect. the immediate freeze, subject to the withdrawal action that I have mentioned. The immediate need is to break the whole structure of inflationary expectations. By which I mean the expectations that prices are going to go up 6, 8, 10 percent next year, therefore, you

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must have wage increases and interest rates that cover that kind of a price increase and must so plan your prices. Nothing else is going to break those expectations apart from serious depression. The game plan of the administration if I may use that somewhat fanciful term is not a cure. I said the other day-one is always in danger of repeating his own humor-that there has been no game plan like this since the Rose Bowl game of 1929, when a man by the name of Roy Riegle ran 75 yards to the wrong goal line.

These inflationary expectations are only going to be changed by the kind of action which we are talking about here this morning. Mrs. SULLIVAN. Would it be possible if we just simply froze everything as is, to police that?

Dr. GALBRAITH. No, not indefinitely. I would urge doing it only for a short period of time, during this time you must also get rid of the inequities that you froze into the system as well as getting rid of the controls on all the prices and wages that you really do not need to fix.

Mrs. SULLIVAN. What consideration would you give to the unemployment consequences of any price control action?

Dr. GALBRAITH. I would attribute great importance to this aspect. When you are no longer relying on these outrageous interest rates for your control then you can ease the housing market, you can ease up on loans for smaller businessmen; you can ease up on consumer credit terms; on municipal borrowing; you can also ease up on the budget and public employment. All of this will have a strongly favorable employment effect.

Price and wage restraint takes the problem of inflation control off the back of the unemployed-that, at least, is one way of putting it. Mrs. SULLIVAN. I realize we are in the craziest kind of economic dilemma that I can remember, with high prices, rising unemployment both at the same time.

When you look at the Consumer Price Index you see that a good part of the increase in the past year has been the reflection of higher medical fees, higher hospital costs, higher public transportation and such, much higher homeownership costs reflecting the higher mortgage interest rates and local taxes.

What can price control do to bring these kinds of prices down?

Dr. GALBRAITH. I am awfully glad you mentioned this business about hospital costs. I should have had a paragraph in my prepared statement on that.

The higher hospital costs are not part of the general pattern of inflation in my view. They are related to two other factors. The first has been a catching-up going in this area, which has been going on a long time. I am not talking about doctors. I am talking about nurses, technicians, custodial personnel, janitors, and so on. It has been long a supposition that because those people were doing such good work, such fine compassionate work, they would be paid handsomely in the next world. So they could be paid low rates in this world. This doctrine no longer holds—perhaps not surprisingly.

So those wages, what we pay in the hospitals, what we pay for people who do the very important job of looking after the sick, have been catching up. It is time they did. There is also the very special problem arising from the shortage of medical personnel. This has