Wage-Price Controls and the Shifting Phillips Curve.

The article performs a statistical appraisal of the impact of the wage-price controls in the U.S. The condition of the U.S. economy improved in almost every respect after the initiation of the wage-price control program on August 15, I971. Real gross national product grew rapidly, unemployment finally began to decline, and the rate of inflation moderated. But the coincidence of timing does not necessarily mean that controls are an essential condition for prosperity, or that the August 1971 message was the key that unlocked the floodgates behind which real aggregate demand had been restrained. The determination of the four basic macroeconomic magnitudes--nominal (current dollar) income, real output, prices, and unemployment--is usefully separated into three subproblems: (1) the determination of nominal income, (2) the division of that nominal income between real output and prices, and (3) the relationship between real output and unemployment. Before the achievement of the control program can be evaluated, a criterion for its success should be established. By my standard, controls can be judged successful if the value to society of the reduction in inflation they achieve relative to that which would have occurred without them is greater than the direct and indirect costs imposed by the control program.