A Blurry Banner for Phase II

PRESIDENT NIXON has summoned a "volunteer army" of wage earners, corporate executives, bankers and consumers to march against inflation--under a blurry banner emblazoned so far with only an official emblem, an organization chart and row upon row of question marks.

What the White House aims to create is a national consensus on wage-price policy that will be mostly self-policing. Standards for pay and price rises are to be set by representatives of labor, management and "the public," not directly by Government officials. The stick of federal compulsion will be available to back up their decisions, but it will fall most heavily on a relative handful of giant corporations and major unions. Drafters of the program have deliberately not provided enough enforcement officers to do anything more than spot-check the wages and prices at small machine shops, corner laundries and car washes. That essentially voluntary approach is a gamble that will succeed only if Americans display a spirit of economic self-sacrifice that, historically, they have shown only in times of all-out war.

The Hard Questions. Nixon tried to arouse that spirit on television. He left most details of his program for others to announce--probably wisely because it is not easy to stir patriotic fervor by unfurling an organization chart. Instead, he concentrated on exhortation. Said the President: "I call upon all of you tonight to look at this program not as Democrats or Republicans, workers or businessmen, farmers or consumers, but as Americans. We cannot afford a business-as-usual attitude anywhere, because fighting inflation is everybody's business."

Nixon left unanswered all the hard questions about what will happen after the wage-price freeze ends Nov. 13. Workers had no clearer an idea than before of how big a raise they can expect, or if they can expect any at all. Company executives were not told what prices they will be able to increase or by how much. Tenants were still wondering when, if and by what amount their landlords will be permitted to raise the rent.

The White House specified only an "interim" goal: cutting the rate of inflation roughly in half by the end of 1972, so that prices then will be rising an average of only 2% to 3% a year. In order to achieve that, some Administration aides imply, wages and benefits will have to be held to a 5% to 6% annual increase. How to get there from here will be decided largely by persons not yet chosen for boards, commissions and other bodies not yet created.

No Cheers for Notre Dame. The organization chart for Phase II of the President's New Economic Policy is imposingly detailed. Nixon set up three committees, two commissions, one council, one administration and one board (with a committee inside it). The key bodies are to act partly as think tanks calculating formulas for allowable wage and price boosts, partly as courts ruling on pleas from businessmen and union chiefs for exceptions from the general standards, partly as prosecuting attorneys' offices seeking injunctions and fines against violators of their decisions. White House aides gave some details in a long briefing paper and background sessions, but these details also raised questions. Major points:

ONE: A Pay Board and a Price Commission will be created as the heart of the Phase II apparatus.

The Pay Board will have 15 members--five each from management, labor and the public at large. They will establish yardsticks for permissible increases in wages, salaries, pensions and other fringe benefits, bonuses, salesmen's commissions and the like. A committee within the board will formulate rules for executive pay boosts. Meanwhile, the Price Commission will do the same for prices and rents. The commission will consist of seven "public" members.

What sort of people will Nixon choose for the crucial posts of "public" representatives on the Pay Board and Price Commission? Judges? Lawyers? Professors? Labor arbitrators? Over the weekend, Nixon men gave the first hint. They named to the Pay Board William G. Caples, president of Kenyon College in Ohio and a former vice president of Inland Steel. Otherwise, Administration officials have been silent. They will say only that they are looking for "tough" people. They are much clearer about whom they do not want: anyone like the Rev. Theodore Hesburgh, president of Notre Dame, who is regarded in the Nixon White House as a wishy-washy liberal.

TWO: After devising general rules, the Pay Board and the Price Commission will weigh particular increases case by case.

An unspecified number of the largest companies and unions will be required to give prior notice of any planned wage or price hikes. Those raises will take effect only if the new bodies approve. A larger number of somewhat smaller but still sizable companies and unions will have to report, probably quarterly, any pay or price boosts they make. The board or commission can order rollbacks of any increases deemed to violate the general standards.

One crucial question is what will happen to wage increases coming due under existing contracts? Some 2,100,000 workers are scheduled soon to get increases averaging 7.6%, which Administration economists figure is too high. Labor leaders, invoking the sanctity of contracts, are threatening to fight in court any attempt to scale down these increases. Connally's position: the Pay Board will decide on each increase, with the understanding that any outsize boosts allowed in a given industry will have to be balanced later by below-guideline increases for other workers. "To the extent they permit large raises," says Connally, "others will have to be smaller."

THREE: The Price Commission will have authority to order a price rollback by any company making "windfall" profits.

What is a "windfall" profit? Connally defines it as an extraordinarily large profit arising out of the operation of the program of wage-price restraints, but confesses that he is unable to offer any examples of how a company might make such a profit. His vagueness is likely to stir suspicion that this part of the control program is merely a verbal sop to union leaders who have been howling for some limit on corporate earnings. One possible example: a company that had raised prices just before the freeze, had a wage increase scheduled under a previously signed union contract delayed by the freeze, and has been keeping as profit the money that would otherwise have gone into pay envelopes. There is also a question as to whether the Administration has the legal authority to order price cuts as well as stopping price increases.

FOUR: Several lesser, but still important bodies will be set up.

A Committee on the Health Services Industry will advise the Pay Board and Price Commission on how to adapt wage and price standards to doctors' fees and hospital charges. A Committee on State and Local Government Cooperation will advise on wage standards for public employees. An Interest and Dividends Committee of high Government officials, headed by Federal Reserve Chairman Arthur F. Burns, will try, presumably by jawboning, to persuade bankers to hold down loan rates voluntarily and corporate executives to hold down dividend payouts. Nixon will also ask Congress for standby authority to set legal ceilings on interest.

FIVE: A Service and Compliance Administration will handle enforcement.

This administration will really be the Internal Revenue Service wearing a second hat; it will be staffed by 3,000 IRS agents working out of 360 field offices around the country. They will investigate complaints of pay or price violations by the big companies and unions that report to the Pay Board and Price Commission. The agents will also spot-check the books of small companies in order to make sure that they are complying with the national wage and price guidelines as well as with the tax laws.

The chairmen of the Pay Board and Price Commission will have authority to seek injunctions and fines against violators big or small; such cases will be prosecuted by the Justice Department. The fine for each violation will be $5,000. That is not as small as it sounds. A machine-tool maker, for example, could conceivably be fined $5,000 for every tool shipped at a higher price than the Price Commission proposes to allow.

SIX: Connally's Cost of Living Council will sit atop the whole structure.

The COLC will stay out of day-to-day administration and will not hear any appeals from the decisions of the Pay Board and Price Commission. Connally says, though, that it will "review" the standards set by the various boards, commissioners and committees to see that they are "in balance" with each other and show real promise of cutting the inflation rate in half by the end of next year. Just what the word review may mean has been left deliberately vague, apparently in order to give Connally maximum scope in guiding the decisions of the other bodies without explicitly threatening their independence.

This whole structure reflects the often-voiced and bitter reminiscences of Richard Nixon, a veteran of World War II Office of Price Administration, which deployed a bureaucratic army of price inspectors across the country. In contrast to the OPA, the number of employees of the new mechanism will be fairly small.

The new program, though, has many jurisdictional oddities. Both a self-employed television repairman and a TV repairman who works for a company will have their incomes regulated--but by different bodies. The Price Commission will set standards applying to the fees that the self-employed repairman can charge; the Pay Board will draw up rules governing what wages the employee repairman can collect. Doctors may eventually be visited by those much-feared IRS agents, inquiring into complaints of "excessive" charges for operations or consultations. But lawyers who are partners in a firm will face no such investigations; income from partnerships will be considered profits, which are unregulated.

These quirks result largely from the fact that the Phase II machinery has been set up to give something to everybody. Labor demanded a tripartite board, including union representatives, to determine pay, while business insisted that only public representatives chosen by a Republican White House rule on prices. Each won its point. Labor in addition got some Government gestures toward control of interest rates and profits--but the limits on "windfall" profits are so far not strict enough to anger corporate chiefs.

Economic Home Run. The first public reaction to this program was a mixture of approval and uncertainty. The most volatile economic indicator, the stock market, wobbled nervously. On the day after Nixon's speech, the Dow Jones industrial average fell nearly eight points, and it closed the week at 894. Investors found it difficult to appraise the program, and they were particularly unsure about what actions the new Interest and Dividends Committee might take.

The nation's businessmen and bankers generally supported the President's actions. Said A.W. ("Tom") Clausen, president of the Bank of America: "We believe his program will begin to make possible an orderly transition out of the freeze." With liberal use of metaphor, Dow Chemical Chairman Carl Gerstacker responded in terms that Sports Fan Nixon understands best: "The President has hit another home run in the fight against inflation." Chrysler Corp. Chairman Lynn Townsend voiced the hope that the Price Commission will allow some increases on '72 models, which came out during the freeze. Said he: "We price only once a year, and the freeze caught us at the worst possible time."

Professional economists were more cautious, but mostly approving. Robert Nathan and Beryl Sprinkel, two members of TIME's Board of Economists, believe that the President was wise in trying to form a consensus on wages and prices before establishing specific guidelines. Sprinkel, although an ideological opponent of economic controls, added that Nixon acted realistically in setting his goal as 2% to 3% inflation by the end of 1972, rather than specifying some lower number that would be more attractive but unreachable.

Many economists and businessmen, however, were more inclined to stress the indefinite nature of much of the program. "Until I see the flesh on the skeleton, I can't tell whether the girl is beautiful or not," quipped Arthur Okun, former chairman of the Council of Economic Advisers. Joseph Pechman, director of economic studies at the Brookings Institution, complained that Nixon "is providing machinery, but not yet a policy for restraining wages and prices." In the judgment of George Sheinberg, treasurer of Bulova Watch Co., the impact of the program "is going to depend almost entirely on the people whom Nixon appoints. He needs more men like Connally--people who really take hold and are effective in a short time."

The Buck Blocker. The program indeed seems largely designed both by and for John Connally. The Phase II structure was planned mostly by Budget Boss George Shultz and Economic Adviser Herbert Stein, and it reflects their horror of controls imposed directly on the economy by Government officials. A mild joke in the White House is that "the only reason that Phase II may work is that the people who designed the controls do not believe in them." It was Connally, however, who insisted that the Administration commit itself to the simple objective of lowering price increases to a 2% or 3% rate about a year from now. He did so against the advice of some members of the Cost of Living Council, notably Shultz, who wanted no numerical guideline at all, and against others who wanted specific, low figures for wages and prices to be reached quickly. A program that would move toward a fairly clear goal, but in ways and at a pace to be defined pragmatically as it proceeded, especially suited Connally's talents as a maker of coalitions and manipulator of pressure groups.

Connally put some of those talents on display at his jammed press conference the day after the President's announcement. He airily asserted that the Pay Board and Price Commission have "a world of time" in which to formulate wage and price standards before the freeze ends Nov. 13--in full knowledge that his Cost of Living Council has authority to promulgate temporary rules if they fail. He disclaimed any role as economic czar, contending that the COLC would not "veto" any standards formulated by the other bodies--and managed to make his stand sound forceful. "We will not let these groups pass the buck up to us," he said sternly. "If the Price Commission permitted prices that patently were exorbitant." he added, "or if the Pay Board announced their own goal of a 6% rate of inflation instead of 2% to 3%--well, at that point we'd lock horns." His self-assured manner left no doubt who would win.

Unspoken Implication. Connally's main job at the press conference was to allay the suspicions of A.F.L.-C.I.O. President George Meany. Fearing above all that an unfriendly Republican Administration would overrule the wage decisions of a tripartite board, Meany had demanded that the Pay Board be completely independent of the Government. He had initially decided to cooperate with the program, but withdrew his support even as President Nixon was speaking Thursday night. Briefings of newsmen by White House aides had led Meany to believe that Connally's COLC would exercise veto power over the Pay Board.

Connally adroitly put Meany on the spot before the nationwide TV audience. Asked if Meany would be on the Pay Board, Connally happily issued a public invitation: "I expect him to be. I hope he will be. He's been asked. I can't imagine that he couldn't make a great contribution." The obvious, but carefully unspoken implication was that if Meany declines to serve and sets organized labor to fighting the program in the courts or on the picket lines, he will be largely to blame for the failure of the most promising effort yet to check inflation.

Whether Meany will be won over is still highly doubtful. He has reserved his decision, pending a meeting this week of the A.F.L.-C.I.O.'s 35-man executive council. Leonard Woodcock of the United Auto Workers and Frank Fitzsimmons of the Teamsters, who head the two largest unions in the country, will also attend, even though their unions are not in the A.F.L.-C.I.O. Both have been asked to sit on the Pay Board along with Meany, although Woodcock has echoed Meany in declining to do so unless he is assured that the board will be independent.

The labor leaders, however, know that they run an immense risk of outraging public opinion if they do not at least go on the Pay Board and see if it can be made to work. If they do join the Pay Board, there will still be rich potential for conflict. Meany intends to demand that all pay raises held up by the freeze be paid when it ends, a step that the White House has said will not be permitted.

Auspicious Indicators. If Nixon and Connally can win labor's grudging acceptance, the stabilization program stands at least a fair chance of success. Economically, Phase II is being set up at an auspicious time. Wholesale prices in September showed their largest drop, 0.4%, in five years. The unemployment rate inched down from 6.1% to 6%--nothing to arouse wild cheers, but still a move in the right direction.

A major imponderable is the attitude of the President. The machinery for Phase II has been designed to operate at not one, but two removes from the White House. In part, that is not a bad idea. Interference by the head of Government eventually undermined the authority of Britain's Prices and Income Board in the 1960s. The President and his aides shaped the Phase II machinery after listening to British veterans of that board advise that the wage-price mechanism be insulated from political meddling.

At some point, however, the President will have to place the prestige of his office directly behind the machinery. Sooner or later, the Pay Board and the Price Commission will have to issue rulings that will be hotly disputed. Nixon will be asked if he supports them. If he dodges, public support will wither. The owner of a corner grocery may obey a ruling backed by the President, but not one on which the President is noncommittal.

The administrative machinery is cumbersome, and the different bodies could find themselves working at cross purposes. The Pay Board, for example, could approve wage increases that would force price boosts larger than the Price Commission wants to allow. The Health Services Committee could advise allowing rises in medical-care costs that would wipe out any gains achieved by holding industrial prices down. Making sure that all parts of this machinery move in unison is the job of, above all, that enigmatic, smiling, charming, menacing, tough Texan--John C. Connally. It is a task to tax even his vaulting ambitions.

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