What to Do in Phase II

The President's New Economic Policy was not handed down from Mount Olympus; it should be subject to the most searching analysis.

--Vice President Spiro Agnew

THE wage-price freeze is only a prologue to a drama that so far has the sketchiest of script outlines. Like an exceptionally thunderous overture, Phase I has startled an audience of some 200 million citizens into rapt attention, and set the mood for the performance to follow. Has it been the beginning of a Nixonian New Prosperity? Or of a rerun of the national tragedy of inflation and unemployment? That will depend on the program that the White House shapes for Phase II, which follows the end of the freeze on Nov. 13.

Not even the President as yet knows the details of the new program. He has been seeking the advice of business and labor leaders, Congressmen, Cabinet members and Governors, who have been giving the most searching analysis to potential policy steps. Late last week Nixon received secret Phase II recommendations from the Cost of Living Council. Now, he must ponder a welter of conflicting ideas. He has made only one real commitment: he will begin announcing a Phase II policy by some time next week.

That policy will aim at two goals: breaking permanently the wage-price spiral, and stimulating business enough to bring the jobless rate down from 6.1% toward 4%, which most economists define as practical "full employment." By itself, the freeze will come nowhere near achieving either objective. If it is succeeded by a weak, waffling Phase II, warns Arthur Okun, a member of TIME'S Board of Economists, the nation will be "no better off on the inflation front than if nothing had been done--perhaps worse off because of disappointed expectations."

Of the two objectives, slowing inflation will be the more difficult to accomplish. The President has rightly ruled out the extreme alternatives: lifting all restraints when the freeze ends, or imposing comprehensive controls that would require an OPA-style army of bureaucrats to enforce. That leaves a totally unprecedented job: putting partial controls on a still wobbly economy at a very late stage of an exceedingly stubborn inflation. In addition, Nixon and many of his advisers, especially Budget Boss George Shultz and Economic Aide Herbert Stein, have in the past shown an ideological horror at any interference with free markets. Casting them as price-control planners, quips Robert Nathan, a member of TIME'S Board of Economists, is "like putting Polly Adler in charge of a convent."

Nixon has spoken of a program with "teeth" that would bite into "all of the economy," but in practice would affect mostly big unions and big companies. That reflects a surprisingly broad consensus that is forming among many business executives and economists. The program recommended by a majority of TIME'S Board of Economists goes like this:

A "PRODUCTIVITY-PLUS" GUIDELINE. The

Government would establish a guideline for wage and price boosts, based on a formula of "productivity-plus." Workers would be allowed increases reflecting the average increase in output per man-hour throughout the economy, plus perhaps half the rise in living costs that had occurred in the previous twelve months. Under this formula, wages and benefits would go up about 5%, v. an average of 8% or more in each of the past two years.

The guideline would have a double standard: prices would not be allowed to rise as fast as wages. Arthur Okun reckons that the price line should be held to 2% annually. That would not be as inequitable as it seems. Productivity gains will offset some of the wage rises, so that a 5% pay boost would not mean a 5% increase in the unit labor costs that companies must pay. Also, workers would have limits placed on their pay raises, but companies would have no limits on their profit increases, which should rise high in a period of business recovery. To make up for that, corporations should be willing to absorb part of any climb in labor costs. A POLICING BOARD. A review board would police the guidelines. It would have legal power to investigate any wage or price increase; it could subpoena company records and compel union chiefs and corporate executives to testify before the board. Occasionally, it might make an example out of penny-ante violations of the guidelines--say, an egregious price increase by a bakery that, while relatively small, had a local monopoly of bread sales. But for the most part, it would concentrate its fire on the largest unions and biggest companies. A POWER TO FINE. The board would try to operate with a minimum of compulsion. Many unions and companies would voluntarily refrain from posting outsize increases, out of fear that the board would arouse the wrath of the public against them. Okun hopes that in practice most would seek the board's guidance informally before negotiating wage increases or raising prices. As a last resort, the board could forbid by law or rescind any increases that it found excessive. It could seek injunctions and fines against flagrant violators of its rulings; Robert Nathan would go further and provide jail sentences.

True enough, the more moderate consensus approach has serious drawbacks and risks. It consists, as Okun says, of "controls for the big fellow and sermons for the little fellow." Okun justifies the seeming unfairness by drawing a distinction between economic "whales" and "minnows," and contending that "careless swimming by the whale and careless swimming by the minnow are very different matters so far as the safety of the creatures of the sea is concerned."

Will that approach work? Some businessmen affirm that controls aimed at large companies and unions would effectively hit smaller ones as well. Says Maurice F. Krug, president of Technology Inc., a firm involved in photographic research: "Kodak is our biggest competitor, and they don't even know we exist. But we have to base our prices on theirs."

The strongest argument for the moderate consensus approach is that the alternatives are worse. A more ambitious program--strict controls on all wages and prices--would be impossible to enforce without the kind of public support that Americans have granted only during wars that were regarded as necessary. A weaker program--wage-price guidelines that could not be enforced by law--would simply invite violation.

Ganging Up. Just who will police the program? As part of the price for their indispensable cooperation (see box), union leaders want a voice in choosing a tripartite wage-price review board composed of members formally representing labor, management and the public. They argue that that is the only way to prevent "antilabor" decisions by a Republican Administration. Businessmen generally want a board composed solely of Government-appointed members. Some possibilities: judges, lawyers, labor arbitrators.

Many economists back the businessmen on this issue. Says Walter Heller, who is also on TIME'S Board of Economists: "On a tripartite board, either the labor and public members will gang up on business, or the business and labor members will come to sweetheart solutions. Generally such a board wants peace at any price." A possible compromise, favored by many Administration planners, is to set up a tripartite board that would rule on wage increases, but have its decisions subject to review by a higher board, composed of Government appointees who would examine price boosts as well. That, however, is unlikely to satisfy labor.

Frozen Popcorn. By concentrating on the big, highly visible wage and price decisions, the board might get by with only a relatively small staff of lawyers, investigators and economists; some estimates go as low as 500 employees. Since it would not be applying rigid controls on all wages and prices, the board could escape some of the niggling questions on which policers of the freeze have been forced to rule. One such ruling classified unpopped popcorn as an agricultural product exempt from the freeze--but held popped corn to be a processed food, and thus frozen.

The Phase II board, however, would confront a long series of troublesome questions all its own. Should a company that was prevented by the freeze from raising prices to offset a huge wage increase be allowed an exceptionally large price boost? Should unionists whose pay has lagged behind that of workers performing the same job in another company be permitted an exceptionally high wage boost? Should a company that has been unable to fill low-wage jobs get an exemption from the guidelines so that it can offer whatever pay raises are needed to attract workers? The Administration is prepared to make exceptions for the sake of equity, but there will be considerable confusion.

Forever? An even graver question is the duration of any wage-and price-control policy. Businessmen, while admitting the necessity of controls, are frankly afraid that they will become permanent. "I know of no country, other than one distraught by war, that ever started down this road and then came back," says Leslie Peacock, president of San Francisco's Crocker-Citizens National Bank. Nixon has proclaimed that any Phase II control mechanism will be only a "way-station" on the road back to free markets. If inflation substantially calms down, he may campaign for re-election on a promise to remove the controls that he imposed. But some less formal type of presidential intervention in major wage bargains and price decisions may well hang on. It is questionable whether any President can ever again stick to a total hands-off policy.

Caution Sign. Breaking the wage-price spiral is only part of the task. The economy must also be prodded into an advance fast enough to create many more jobs. For that, Nixon in August proposed tax cuts of $4.5 billion in the form of credits that would go mostly to companies investing in new plants and machinery, and $2.2 billion for individuals. His program faces an uncertain fate. Union leaders and Democratic liberals charge that the investment tax credit, combined with $3 billion of relief granted earlier to corporations through accelerated depreciation schedules, constitutes an unjustified bonanza for companies.

In any balanced tax program, some spur to investment in more productive machinery is needed. Nixon's critics make much of figures showing that U.S. industry is operating at only 73% of capacity; these opponents contend that corporate executives are unlikely to increase investment greatly when so much of their existing plant lies idle. The statistics are not gathered by the Federal Reserve, which publishes them, but by McGraw-Hill, Inc., which matches production figures against an annual survey of the capacity increases planned by large companies in 18 industries. Clayton Gehman, a Federal Reserve economist, says that the figures should be "regarded with caution." He suspects that the true operating rate of U.S. industry is about 82% of capacity.

Postponing a Raise. Congress would nonetheless be well advised to knock out some of the accelerated depreciation and give more tax relief to individuals, preferably by postponing part of an increase in Social Security taxes proposed to take effect Jan. 1. Congress is now considering a bill to boost the total paid by people earning $10,200 or more a year from $406 to $551, wiping out for many families all the personal tax breaks requested by Nixon. Postponing some of this increase, rather than legislating further permanent tax cuts, would serve a double purpose. It would put more spending money into the consumer's pocket, yet still help to preserve the long-run capacity of the Government to raise tax revenue. Washington will shortly need every dime that it can collect to bankroll much-needed social programs.

In cold economic terms, the arguments over the tax package are probably now less important than those over wage-price policy. No amount of tax relief will lift the economy unless consumers can feel assured that future pay increases will not be ruthlessly chewed up by inflation, and businessmen can plan investments with reasonable certainty that their profits will not be devoured by voracious costs. Tough but flexible controls on major wage and price decisions may not work, but failure would have frightening implications. It would tempt people to conclude that inflation can be checked only by a recession far deeper than last year's, or by a straitjacket of controls on the entire economy. That either-or prospect should be enough to induce businessmen and their employees to support a sensible, temporary wage-price policy --and make it work.

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