A Controversial Comeback

ANYONE who happened to overhear random conversations around the Price Commission last week probably decided that its next report will have to be issued in a plain brown wrapper. The commission's economists were talking about a plan with the multi-entendre name of "re-virgination." At first glance re-virgination would seem to promise a return to a state for which there is little nostalgia. The idea is that, at the commission's urging, corporations would roll back many of their recent price increases and make refunds to customers who had been forced to pay them. That is hardly an attractive proposition by itself, but managers of some big companies have expressed interest in re-virgination because it includes an enticing reward for such rollbacks: companies would no longer be subject to the commission's limits on profit margins. In effect they would be returned to a state of pre-controls innocence.

Crescendo. Under the commission's present limits, a company that has raised its prices during Phase II may not increase its margins--that is, profits as a percentage of sales--above what they were in a certain base period. The base is the average of the best two years between 1968 and 1970. Many a corporate chieftain deeply wants to be out from under those constraints because earnings are rolling in faster than they have in years.

New York's First National City Bank reports that a group of 1,368 big companies totted up 15% more earnings during the first half of 1972 than in the equivalent period a year ago, and profits in the second quarter were up 16%. Estimated profits after taxes for the whole economy rose to an annual rate of $53 billion, a record (see chart). Alan Greenspan of TIME'S Board of Economists predicts that after-tax earnings in this year's fourth quarter will run 19% higher than those a year earlier. Says Raymond Jallow, senior vice president of United California Bank: "We see very much of a boom in profits in the second half of this year."

Nearly all industries are enjoying an earnings bonanza, which suggests that it is based on a solid, sustained expansion of the whole economy. Profits were up in 27 of the 32 industries in Citi-Bank's study, and the list of companies that have reported an after-tax earnings gain of 20% or more in the second quarter is impressive--General Motors, Ford, IBM, Sperry Rand, DuPont, Union Carbide, Caterpillar Tractor, International Paper, B F. Goodrich, Eastman Kodak and Zenith. Small firms in the same fields are often doing even better, according to Michael K. Evans, president of Philadelphia's Chase Econometrics, "'because they were hurt worse in the recession and so are starting from further back."

Though the strong surge is a healthy economic sign, it is stirring a controversy over whether earnings are growing too fast, especially for a controlled period in which wages are not expanding nearly as rapidly. The argument is bound to become louder as the election approaches and will probably reach a crescendo next year, when an exceptionally high number of contracts with important unions are due to be renegotiated, including those of the Teamsters and the United Auto Workers.

Labor leaders and some Democrats argue that current profits are steep enough. They point out that the recovery has been slow going for everyone, not just investors who relish high corporate earnings. Furthermore, thanks to tax breaks granted to business by the Nixon Administration, corporations have more money available for reinvestment and expansion than just the profits that they report to stockholders. By taking advantage of the accelerated-depreciation program, a firm can increase its cash flow with funds deferred from current taxation. Finally, there is a basic question of income equity. Profits are advancing at a much faster rate than personal income, which has barely managed to keep pace with inflation over the past few years.

The Engine. On the other side, businessmen maintain that, far from being too steep, the rate of profit gain in the current economic recovery is low by past standards. Earnings have rebounded by only 18% in the past year and a half--the slowest comeback, by most measures, that has followed any recent U.S. recession. Average after-tax profit margins are today running at about 5% of sales, whereas they hit 7% during the boom years of the '60s.

Among other things, businessmen insist, higher earnings are really needed to help finance the building of new plants and the purchase of new machines. These capital investments create business growth, which would knock down the nation's persistent and demoralizing high unemployment rate. July's jobless rate at 5.5% remained unchanged from June.

John Maynard Keynes called profits "the engine which drives enterprise." Millions of Americans depend on that engine to a great degree not only for their jobs but also for financial growth through profit-sharing funds, pension funds and dividend payments. Profits are used to enrich not merely a relatively few corporate managers and big shareholders but also masses of wage earners. When profits are perking up, a company's management is more willing and able to grant wage and salary increases to its employees. High-profit companies can be expected to spend more than low-profit firms to invest in antipollution devices or to hire, train and promote the hard-core unemployed.

Still, many critics question whether the earnings of America's corporations should benefit as directly as they now do from Government tax policy, especially since money is so sorely needed to pay for progress in the public sector at a faster rate than private companies seem willing to finance it. No matter who wins the election in November, businessmen can probably expect their corporate treasuries to be hit in the next round of tax reform.

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