ECONOMIC

spurring of domestic inflation by encouraging exports and discouraging theinvestment needed to ensure adequate supply in the long run. Plans fordecontrol were also needed to serve the ultimate goal of return to a freemarket economy.The considerations gave rise to a Phase IV system that was stricter thanthat of Phase II, though it contained some regulations developed earlierto deal with specific circumstances in particular industries. Phase IV wasstricter than Phase II in three ways.1. Price increases in manufacturing and service industries were limitedto the dollar and cents amount of allowable cost increases, with noadd-on permitted to maintain percentage markups.2. Only cost increases since the last fiscal quarter of 1972 could be usedto justify price increases. This rule wiped out some cost justification thathad been built up earlier in the controls period.3. In Phase IV new base prices were established to which actual pricescould rise without cost justification; in some industry sectors thesenew base prices were below those of Phase II.Special regulations were drawn up for the insurance and petroleum industries.Phase B of the food regulations took effect September 10. Newregulations for the health industry were issued on January 16, 1974. Themajor aspects of Phase IV are summarized in Table 22 and discussed inmore detail in the Quarterly Reports of the Cost of Living Council.Phase IV also incorporated a new strategy for achieving a return to freemarkets: decontrol of selected industries in appropriate cases. Lumber,copper scrap, public utilities, and coal sold to utilities under long-termcontracts were decontrolled at the outset. In the administration of Phase IV,each request for price and wage increases is reviewed individually. In suitablecases decontrol has been made contingent on agreements by the firmsto expand output or capacity or to limit exports. In these and other instances,exemptions have been subject to a requirement that the firms furnish Governmentagencies with data on their prices, exports, and investment in newfacilities.Likely candidates for decontrol have been industries producing basic commoditiesfor which there was excess demand, since low domestic prices promotedan unwanted rise in exports, as well as reducing supplies and providingless incentive to expand production. Thus, fertilizers and most nonferrousmetals have been decontrolled during Phase IV.In some sectors where there had not been a build-up of cost pressures,decontrol would not lead to a spurt in prices. No advantages would be gainedby applying controls in these cases. Thus rents, which are difficult to regulatefor administrative reasons, were exempt from Phase IV controls, as they hadbeen in Phase III, and lumber was decontrolled for similar reasons. Partlyfor the same reason, both wages and prices were decontrolled in the autoindustry, after a new wage contract for auto workers had been signed and98