Salvation by Subsidy

The Administration this week rolled up its artillery in a last-ditch attempt to stabilize prices and wages, and to hold John L. Lewis.

Move No. 1 was announcement of a subsidy program, running as high as $2 billions per year, which would be used to hold down the cost of living. Of this amount $400,000,000 will be paid to processors of seven vital foodstuffs-in order to induce a 10% reduction in their prices.

Move No. 2 was the imposition of dollars-&-cents ceilings on most important foods in 150 major cities. These specific ceilings will take the place of the confused jumble of prices which resulted from previous freezing orders. From now on, in any given locality, there will be only one maximum price for canned grapefruit juice, for instance. Since this price will be widely publicized, it. should be easier than it has been in the past for housewives to help the Government enforce price ceilings.

No Steering Gear. Both moves were taken with the full blessings of President Roosevelt, Economic Czar James F. Byrnes, and Price Czar Prentiss M. Brown. Both were aimed to head off John Lewis' continued demand for a $2 a day raise for his miners, and to quiet the rumbles of dissatisfaction from other labor leaders, who claim that wages are being frozen while prices are allowed to run free. And both moves foretold the end of the price-fixing philosophy that has prevailed in Washington for the past year.

The philosophy (which was finally put into effect in March 1942) assumed that inflation can be stopped just by proclaiming that all prices are frozen as of a given date. But, as Columnist Walter Lippmann argued last week, the idea that a general price freeze will be effective is pure illusion:

> In converting an economy from peace to war, some prices and wages must move if men and machines are to find their proper uses. (To try to run the U.S. economy with a completely frozen price system, Mr. Lippmann pointed out, is like trying to run a car without a steering gear.)

> In trying to hold all prices in line, the Administration ran the danger of successfully stabilizing inessential luxuries such as fur coats while failing to stabilize critical (and scarce) cost-of-living items. This is just what has happened. Since March 1942, general wholesale prices have advanced only 5%, as compared with a 14% advance in weekly factory earnings. But food prices went up by at least 16% (some food items doubled), which pushed the cost of living up 7%. This advance in food prices--the biggest single item in living costs--gave labor its most powerful arguments for breaking through the President's hold-the-line order of April 8.

The British Experience. Price Czar Brown is now concentrating-attention on a few essential prices. In so doing, he has followed the example of Britain and Canada. Both countries tried general price-freezing regulations without too much effect. But both have brought critical cost of living under control to a far greater extent than in the U.S. In Britain, for instance, the cost-of-living index (see chart) has actually declined slightly during the past year, after zooming way up before the British subsidy plan took hold.

Britain has held the line through the shrewd use of subsidies. Under them the Government pays a premium for increased production without directly penalizing the lowincome, consumer (although other consumers, as taxpayers, pay in the end). The Ministry of Food buys up most of the supply of some goods, for instance, then distributes them at a loss. Subsidy has been relatively easy in Britain because she imports so many raw materials. Canada has also successfully applied the subsidy system to tea, coffee, oranges and other staples.

Congress Objects. The U.S. is already paying some $500,000,000 a year to subsidize marginal copper mines, sugar, coal and petroleum transportation. But the Farm Bloc has always balked and is still balking at applying subsidies to foods raised in the U.S., because their payment in effect puts enormous power in the hands of the Administration.

This week Congressmen threatened to sabotage Prentiss Brown's new program. But Brown was confident that he would succeed. First move will be to get the RFC to pay the subsidies. Second move will be to carry the fight to Congress itself and get outright appropriations. Prentiss Brown pointed out that a provision for subsidies is contained in the original price-control act.

No Panacea. If subsidies can be shrewdly applied to stabilize the cost of living, the Administration will have begun to win an important home-front victory, for it will have done all that Labor can ask for by way of holding essential prices in line.

But subsidies are no general panacea. They are complicated, and can be applied to relatively few items. They cannot possibly hold down the general price level, in which many items, notably luxuries, should perhaps be allowed to go up faster than OPA has so far conceded.

Nor are subsidies a substitute for a bolder tax program to trim purchasing power into line with the shortage of consumer goods.

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