Discussion of Phase II Papers

SEVERAL DISCUSSANTS COMMENTED on the issue of income shares under the Phase II program. R. A. Gordon, William Branson, and others noted that, with productivity growing exceptionally fast because of the rapid cyclical expansion expected in the economy, profit margins would widen so much that some cost absorption by business would still permit the profit share to expand. Arthur Okun noted that Perry’s neutrality was defined as the state of income shares that would prevail in the absence of the program and that the cyclical expansion of profit margins that we are experiencing would have occurred anyhow. Gardner Ackley argued that we did not know enough about what has happened to price-cost relations in recent years to take any strong position about what income shares should be. Therefore Perry’s neutrality concept should not override the need to slow inflation, and some cost absorption was appropriate as a way to help accomplish this. James Duesenberry and Michael Posner felt that the most serious practical problem was not the question of existing income shares but rather delivering on the promise to slow prices noticeably. The trade unions are reluctant to accept wage controls because they have little faith that the inflation will slow down. Forcing some cost absorption on business will demonstrate that the program’s main concern is to slow prices and will in fact slow the inflation more quickly and certainly. George Perry commented that he was not making a case that shares were sacred or that equity demanded neutrality. In practice, he favored a tough application of the Price Commission’s basic cost-price rules that would lean much more in the direction of price stability than the commission had until now. In practice, this might well put some downward pressure on profits compared with what they would have been without the program. But he thought the asymmetry in Ackley’s cost-absorption rules should be recognized and believed that a wage-price program was most likely to command support for an extended period if, in principle, it was neutral about income shares.