Scrutinizing Profits

PHASE II

The long-awaited report card on this year's first quarter, released last week, provided statistical support for almost everyone's favorite argument about the economy. Yes, the nation is well on its way toward a strong recovery from the recession, as was shown by a full-steam rise of almost 12% in the gross national product, to an annual rate of $1,103 billion. That is right on the path toward the full-year gain of almost $100 billion predicted by the Nixon Administration. But no, the economy is not registering as much real growth as it should; more than half of the G.N.P. rise, 6.2%, simply reflects higher prices.

Why did prices jump so fast? In part it was because inflation during the last two quarters of 1971, which cover the period of Nixon's freeze, was held to the abnormally low rate of 2% or so. Thus some of the price increases early this year were onetime catch-up measures. Assistant Commerce Secretary Harold Passer predicted that inflation during the second quarter would show only a 4% gain and then "taper off." His forecast gained considerable credence when the March consumer price index appeared. For the first time in more than five years, store prices showed no increase above those of the previous month--a very hopeful sign.

Treble Refunds. Even so, the substantial spurts in living costs during earlier months have created a rising feeling of frustration among the nation's workers. At Congressional Joint Economic Committee hearings last week, Pay Board Chairman George Boldt boasted that wage increases allowed by the board have averaged only 4.3% since Phase II started in November. Committee Chairman William Proxmire* observed that "wages are being controlled more effectively than prices."

Price Commission Chief C. Jackson Grayson vowed that his group will get much tougher with firms that ask for --or have already been granted--price raises. Some 250 investigators are examining the first-quarter profit statements of 2,000 big companies, most of which have increased prices. The sleuths are scanning newspapers for stories of any large profit increases.

Under the commission's rules, big firms are not allowed to increase their profit margins--their earnings as a percentage of sales--over those of a pre-freeze base period. But of 129 reports so far examined, Grayson reported, no fewer than 51 exceeded the allowable limit on margins. When asked by a member of Proxmire's committee whether he would order violators to roll back prices and make refunds to customers, Grayson replied: "That's exactly what we hope to do." Price violators are liable under law for treble refunds. Just how literally the Price Commission interprets its own rules might well turn into a lively political issue this year.

Price rollbacks would reduce profits and infuriate many businessmen. They argue rightly that profits are the necessary fuel for still further expansion of the economy and that until recently they have been low. But recent profit gains, some of them spectacular, are bound to lead to questioning of whether some earnings have been rising too fast lately. Companies as varied as Goodyear and IBM have just reported the highest earnings in their history; the first-quarter, after-tax profits of 669 U.S. companies averaged 12% above those of a year ago. It will be the difficult job of the Price Commission to determine whether to promote fast profit growth in order to stoke further economic expansion, or to hold back the earnings rise in hopes of lowering the rate of inflation.

-Whose new hair transplants are being referred to as Fuzz II.

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