Phase III Shapes Up

ONE of the larger inconsistencies of Richard Nixon's decision to clamp wage and price controls on the U.S. economy 16 months ago was that he had originally opposed the legislation that authorized his move. Last week, in a step that brings the turn-around full circle, Administration officials announced that they will ask Congress for an extension of the law, which gives the President sweeping powers to "issue such orders and regulations as he may deem appropriate to stabilize prices, rents, wages and salaries," before it expires April 30. Nixon evidently plans to do some reshaping of the anti-inflation program at the same time, though he has not yet decided how much. But Economic Coordinator George Shultz made one thing perfectly clear: any continued controls will not be put on a totally voluntary basis. Phase III, Shultz promised, will have "a mandatory element in it."

Nixon and most of his advisers would clearly like to streamline their creation, perhaps by exempting medium-sized businesses or by removing controls from retailers, landlords and others at the end of the selling line. Theoretically, such people are forced to set prices that meet the competition. The President is well aware, however, that 1973 will be packed with labor negotiations--contracts covering at least 4.7 million workers come up for review or renewal, v. only 2.8 million this year. "If the program isn't there at the retail level, it isn't there at all, as far as ordinary people are concerned," says one Washington official. "That's their contact with it." Except, of course, for their paychecks--and the President may have to retain much of the complex price apparatus in order to put continuing pressure on unions to moderate their pay demands.

Upsurge. For their part, businessmen are urging the Administration to change or chuck out the profit-margin test, which disallows price increases to firms that are making a bigger rate of return on their sales than during a base period. In the present economic upsurge, quite a few big companies are hitting their profit-margin ceiling. Arthur Okun, a member of TIME'S Board of Economists and a Democrat, agrees that the test "is counterproductive as far as efficiency is concerned." Overly profitable firms can always lower their earnings through heavy spending. Some economists, notably Federal Reserve Chairman Arthur Burns, would also like to trim the present wage guideline of 5.5%, but the Administration recognizes that it would have great difficulty keeping price increases low enough to make such a move equitable.

Though almost everyone has ideas on how to make the system fairer, the vast majority of businessmen, labor leaders and politicians are clearly in favor of retaining controls in some form as a weapon against inflation. During the first eleven months of Phase II, the consumer price index rose 3.5%. That is higher than the 2% to 3% inflation rate that the President has specified as his goal, but a bit below the 3.8% pace at which prices were rising in the months before the August 1971 freeze. Wage settlements also are running higher than the guideline, but not much. Neither moderation is solely the result of economic controls; an expanding economy normally produces efficiencies that chip away at inflation and thus keep workers from demanding sharply higher wages. But most economists, including a majority on TIME'S board, give Phase II credit for some of the progress.

Where Phase II has failed, and failed badly, is in containing food prices. They were left uncontrolled on the farm level partly because of the practical problems of policing them. Officials also feared that agricultural controls would cause shortages--and a farmer revolt at the polls. Unhappily, for a variety of political as well as economic reasons, the Government's broadest gauge of farm prices soared 22.5% in the twelvemonth period ending last September, v. only 3.3% in the previous year; prices seem to be headed even higher now (see story, next page). Shultz rather meekly admitted that "in the area of food prices we have had a very difficult experience and we obviously have to think hard about that" in Phase III. Shultz remains convinced that direct controls might discourage some crop production, and thus are not the answer. But Herbert Stein, chairman of Nixon's Council of Economic Advisers, recently provided a hint of Administration thinking by suggesting that farmers take a "lower-priced route," along which they presumably would be encouraged under federal acreage-allotment programs to grow more and sell cheaper.

The shape of Phase III will also depend on how close the President comes to meeting his federal budget goal of $250 billion in the current fiscal year. Administration economists apparently believe that if federal spending can be held to that sum, then one major source of inflation will have been effectively curbed, and the controls program can safely become looser. Shultz kept the economy drive in high gear last week by announcing a temporary hiring freeze in the Executive Branch and a decision to stop any pay raises for Congressmen, Cabinet officers and federal judges throughout next year.

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