Wanted: Price Cuts

In 1958's paradoxical recession, perhaps the biggest paradox of all is the leapfrogging race between prices and wages that has continued long after the general economy paused for a breath. Though price cuts are on the rise (see Metals), they have not been fast or sharp enough to hold down the steady rise in the cost-of-living index. Nor has labor trimmed its wage demands in the face of poor sales and lower profits (see Autos). Last week Chicago Federal Reserve President Carl E. Allen took both management and labor to task for what he called a "price and cost rigidity" that hinders the U.S. economy. His plea: more flexibility as one answer to the recession.

The first rule for any growing economy, said President Allen, is a stable overall price structure based on supply and demand. "If prices are free to reflect changes in consumer demand, increases in some items will be offset by decreases in others. Few people seriously doubt that price stability is essential to economic growth. Yet there are those who infer that there is no connection between the two. One does not exist for long without the other. It is like asking whether the mother or the father is preferable in creating a family."

Labor unions, says Allen, "introduced undesirable rigidities into our cost structure" with the automatic cost-of-living hike that makes about 4,000,000 workers eligible for wage increases in 1958. Employers in turn "accepted such rigidities so long as selling prices could be increased without reduction of markets." Now the situation has changed. "We have had several months of declining industrial production. And the decline in business volume is conspicuous in those industries which set the fashion of long-term wage contracts with assured annual increases." What is needed are sharp price cuts. But instead, some industries have actually increased their prices. Concludes Banker Allen: "This is a new, a novel and a frightening theory of consumer behavior. It amounts to saying that consumers will neither be able nor willing to buy more goods and services at lower prices than at higher prices. It amounts to repealing the principles of economic behavior in a private-enterprise economy. It rejects the essential readjusting mechanism, flexible pricing, which can contribute so much to sustained high levels of employment and output. It ignores--but, you may be sure, it does not repeal--the law of supply and demand."

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