Now, On to Phase II

THE Phase 11 wage-price curbs have changed so much lately that the period now beginning might be called Phase 11 1/2. The inflation-fighting program started six months ago as a sweeping attempt to put controls on companies of all sizes, down to side-street delicatessens and hand laundries, with only a small enforcement mechanism. Now the operation has been streamlined into something much closer to what most economists had recommended all along. The Nixon Administration will restrict controls to the major companies that set the pace for the economy, and back the controls by tougher policing and the threat of well-publicized punishment.

The biggest change came last week, when the Cost of Living Council exempted from controls some 5,000,000 companies that have 60 or fewer employees each (small companies in the inflation-ridden fields of health care and construction are still controlled). COLC Director Donald Rumsfeld said: "It appears to us that competition will exert pay and price control on these small businesses."

More Rollbacks. The small companies that were liberated account for about one-fourth of U.S. industry's sales and jobs. Some 900 Internal Revenue Service agents will be freed from the job of poring over the books of these firms and shifted to the more productive task of investigating complaints against larger corporations. In all, nearly 2,000 IRS men will be policing the big companies. As Herbert Stein, head of President Nixon's Council of Economic Advisers, put it: "We can watch many more billions of Gross National Product by watching General Motors than by watching the corner grocer."

Simultaneously, the Price Commission continued to toughen its regulation of the companies with annual sales of $50 million or more that must report price and profit data. The commission ordered more rollbacks involving major companies, though relatively minor products. Textron Inc., for example, must rescind a price increase on snowmobiles, and Armco Steel will have to cancel hikes on such merchandise as soap and hammers sold in its oilfield supply stores, which account for less than 1% of Armco's sales. Both companies were also ordered to refund money to customers who were charged the higher prices. Associated Wholesale Grocers, which has sales of $240 million a year, became the second company to be assessed triple damages for raising prices. The commission ordered it in effect to pay these damages to customers by severely cutting prices.

The commission also cracked down on the distressingly large number of companies that, it says, have been supplying it with suspicious-looking data or none at all. Under its complex rules, price boosts must not increase a company's profit margin--its ratio of earnings to sales--above that of a pre-control base period. To enforce that rule, the commission had ordered that 2,954 companies file profit-margin reports by last week. Nearly 1,600 failed to do so.

Chairman C. Jackson Grayson ordered them to come up with the figures by this week or else roll back all price increases previously granted and face fines of $2,500 each.

Grayson's hard line has frightened Wall Street and helped to knock the Dow Jones industrial average down 28 points in the past three weeks, to a Friday close of 941. Investors fear that Grayson will block all large profit gains by ordering wide-ranging price cuts. Some Administration officials worry that nervous businessmen might react by holding back on investments and expansion plans, hindering the economic recovery. Grayson has been warned about this concern, but the Price Commission acted anyway.

Overdone Worries. The fears are vastly exaggerated. Companies that have profit margins below the Commission's ceilings, and thus can boost prices, greatly outnumber those that are above the ceilings. Eastman Dillon, a leading investment-banking house, calculates that pre-tax profits of all manufacturers could average 8.2% of sales without violating the Commission's ceilings--but that they actually were only 6.9% in last year's fourth quarter, leaving plenty of room for price-increase requests. Even companies that are close to their margin ceilings can raise profits without limit as long as they do it by increasing sales or improving productivity rather than by raising prices. The Price Commission last week specifically reaffirmed its policy of not ordering such firms to cut prices, no matter how much their profit increases. Phase 11 1/2 is thus not a war on profits--which would be inconceivable in a Nixon Administration--but the most thorough test yet of the idea that inflation can be checked by monitoring large corporations.

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