Incomes policy

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Incomes policies in economics are wage and price controls, most commonly instituted as a response to inflation.

Such policies were resorted to in the USA in the 1960s and 1970s as a response to stagflation, but were removed within a few years when they seemed to have no effect on curbing inflation. Incomes policies were also unsuccessful in the United Kingdom in the 1970s[citation needed]. However, experience in some other countries, including Australia and the Netherlands has been more favorable.

Contents

[edit] Theory

Incomes policies vary from "voluntary" wage and price guidelines to mandatory controls like price/wage freezes. One variant is "tax-based incomes policies" (TIPs), where a government fee is imposed on those firms that raise prices and/or wages more than the controls allow. This is seen as internalizing the external cost of raising prices and/or wages, solving a market failure that encourages inflation.

Some economists agree that a credible incomes policy would help prevent inflation. However, they would have other effects. By arbitrarily interfering with price signals, they provide an additional bar to achieving economic efficiency, potentially leading to shortages and declines in the quality of goods on the market, while requiring large government bureaucracies for their enforcement.

Some economists argue that incomes policies are less expensive (more efficient) than recessions as a way of fighting inflation, at least for mild inflation. Yet others argue that controls and mild recessions can be complementary solutions for relatively mild inflation.

The policy has the best chance of being credible and effective for those sectors of the economy dominated by monopolies or oligopolies, particularly nationalised industry, with a significant sector of workers organized in labor unions. These institutions enable collective negotiation and monitoring of the wage and price agreements.

Other economists argue that inflation is essentially a monetary phenomenon and the only way to deal with it is by controlling the money supply, either directly or by means of interest rates. They argue that price inflation is only a symptom of previous monetary inflation caused by central bank money creation. This view holds that without a totally planned economy the incomes policy can never work, because the excess money in the economy will greatly distort areas which the incomes policy does not cover.

[edit] Examples

[edit] United States

During World War II, price controls were used in an attempt to control wartime inflation. The Roosevelt administration instituted the OPA (Office of Price Administration). That agency was rather unpopular with business interests and was phased out as quickly as possible after peace had been restored. However, the Korean War brought a return to the same inflationary pressures, and price controls were again established, this time under the OPS (Office of Price Stabilization).

In the early 1970s, inflation had been much higher than in previous decades, getting above 6% briefly in 1970 and persisting above 4% in 1971. U.S. President Richard Nixon imposed price controls on August 15, 1971. This was a move widely applauded by the public and some number of (but by no means all) economists. The 90 day freeze was unprecedented in peacetime, but such drastic measures were thought necessary. Also motivating the controls, it should be noted that on the same date that the controls were imposed, 15 August 1971, Nixon also suspended the convertibility of the dollar into gold, which was the beginning of the end of the Bretton Woods system of international currency management established after World War II. It was quite well known at the time that this would likely lead to an immediate inflationary impulse (essentially because the subsequent depreciation of the dollar would boost the demand for exports and increase the cost of imports). The controls aimed to stop that impulse. The fact that the election of 1972 was on the horizon likely contributed to both Nixon's application of controls and his ending of the convertibility of the dollar.

The 90 day freeze became nearly 1,000 days of measures known as Phases One, Two, Three, and Four [1], ending in 1973. In these phases, the controls were applied almost entirely to the biggest corporations and labor unions, which were seen as having price-setting power. With such monopoly power, some economists saw controls as possibly working effectively (though they are usually skeptical on the issue of controls). Because controls of this sort can calm inflationary expectations, this was seen as a serious blow against stagflation.

The controls were abandoned in 1972 (about the same time as the Bretton Woods system was finally abandoned).

Since that time, the U.S. government has not imposed maximum prices on consumer items or labor.

[edit] United Kingdom

The Callaghan government in the United Kingdom in the 1970s sought to reduce conflict over wages and prices through a "social contract" in which unions would accept smaller wage increases, and business would constrain price increases. The policy was unsuccessful[citation needed].

[edit] Australia

Australia implemented an incomes policy, called the The Accord during the 1980s. The Accord was an agreement between trade unions and the Hawke Labor government. Employers were not party to the Accord. Unions agreed to restrict wage demands and the government pledged action to minimise inflation and price rises. The Government was also to act on the social wage. At its broadest this concept included increased spending on education as well as welfare.

Inflation declined during the period of the Accord, which was renegotiated several times. However, many of the key elements of the Accord were weakened over time, as unions sought a shift from centralised wage fixation to enterprise bargaining. The Accord ceased to play a major role after the recession of 1989-92, and was abandoned after the Labor government was defeated in 1996.

[edit] Netherlands

The Polder model in the Netherlands is characterized by tri-partite cooperation between employers' organizations such as VNO-NCW, labour unions such as the FNV, and the government. These talks are embodied in the Social Economic Council (Dutch: Sociaal-Economische Raad, SER). The SER serves as the central forum to discuss labour issues and has a long tradition of consensus, often defusing labour conflicts and avoiding strikes. Similar models are in use in Finland, namely Comprehensive Income Policy Agreement and universal validity of collective labour agreements.

The current polder model is said to have begun with the Wassenaar Accords of 1982 when unions, employers and government decided on a comprehensive plan to revitalize the economy involving shorter working times and less pay on the one hand, and more employment on the other.

The Polder model is widely, but not universally regarded as successful incomes management policy [1].

[edit] Zimbabwe

In 2007 Robert Mugabe's government imposed a price freeze in Zimbabwe. Coupled with high inflation this soon led to shortfalls.

[edit] References

  1. ^ http://www.presidency.ucsb.edu/ws/index.php?pid=3868 Richard Nixon speech announcing Phase Four price controls, June 13th, 1973

[edit] External links

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