Some Freedom for Good Behavior

WITH his infinite capacity for surprise, President Nixon last week unfurled Phase III--a new anti-inflation program that goes much further than almost anyone had expected toward giving more economic freedom to managers and workers. Though the change was dramatic, the announcement was carefully low-key. Instead of the presidential TV address that started the wage-price freeze 17 months ago or the flurry of last-minute directives and guidelines that launched Phase II, there was only an executive order, a message to Congress and some press briefings. The shunning of theatrics was appropriate: it reflected a decision by Nixon and his closest advisers that the elaborate controls of Phase II had done their job and that the time had come to move to a looser system. Nixon wanted to act before the controls caused serious distortions in the economy and became widely unpopular, or before the nation became overdependent on them.

The President scrapped much of the control mechanisms of Phase II and substituted a kind of honor system in which most companies and unions will be expected to obey pay-price guidelines voluntarily. For those who abuse their new liberty, the Government will retain what Treasury Secretary George Shultz called a stick in the closet--the authority to enforce compliance with the guidelines. In essence, Phase III follows the "jawboning with teeth" strategy long championed by Nixon's Democratic critics. Indeed, it is close to a campaign proposal of George McGovern's. Its main features:

>With few exceptions, even the biggest companies and unions no longer need to get Government approval before raising wages or prices. Initially, at least, they can negotiate any pay raises or post any price boosts they feel justified--though they will still face the possibility of later rollbacks.

>Small companies and unions--those with fewer than 1,000 workers--will be entirely exempted from the program. They will not even have to keep wage-price records. All federal rent controls will be abolished.

>The Pay Board and the Price Commission will go out of business within 90 days. Enforcement of the program will be taken over by the Cost of Living Council (COLC), which will have to decide which wage and price boosts to ignore, which to try to pare down in negotiation and which simply to order reduced. The COLC will be headed by John T. Dunlop, a tough, politically savvy labor economist and dean of Harvard's faculty of arts and sciences, who is equally respected in the dissimilar worlds of hardhats and mortarboards.

>The COLC will set wage-price guidelines. For the time being, it is keeping them about the same as in Phase II, though it may well change them later. It can investigate increases that seem to go beyond the guidelines, and order them cut down. But the COLC will have only enough staff to focus on egregious violators; the number of Government employees policing pay-price behavior will be halved to 2,000.

Many economists worry that the dumping of Phase II and its mandatory controls was premature. They see some danger that wages and prices will bulge in the next few months as union and company chiefs test how far they can go under the new rules. Even so, the President decided that he could take the gamble because of the economy's good behavior. Despite sharp increases in food prices, the formal control mechanism of Nixon's Phase II has performed well. The pace of price increases slowed from 4.7% in 1971 to 3% last year, and Nixon's newly proclaimed goal for the end of this year is 2.5%.

Nixon will keep mandatory controls on several enterprises that have a particularly strong grip on the American wallet. Hospitals and nursing homes can raise prices no more than an average 6% a year. Doctors and dentists can increase fees only an average of 2.5%. Major food processors will still have to get prior approval for price boosts, and grocers' markups will be closely regulated. Construction wage hikes must be cleared by the Construction Industry Stabilization Committee.

In other areas of the economy, businessmen may raise prices only to reflect higher costs, and then only if the increases do not lift profit margins above a certain ceiling or are limited to 1.5%. The guideline for wage increases at least temporarily stays at 5.5%, or at most 6.2% when all fringe benefits are included. As Nixon put it, "Business and workers will be able to determine for themselves the conduct that conforms to the standards."

So that the COLC can check on their behavior, the nation's 800 largest corporations--those with sales of $250 million or more--must report price changes quarterly, and unions representing 5,000 or more workers must report wage changes as they occur. Companies with sales between $50 million and $250 million, and unions representing between 1,000 and 5,000 workers, must keep records that Internal Revenue Service agents can spot-check. After it gets the reports, the Cost of Living Council can demand explanations of increases that seem to violate the guidelines, set interim price and wage levels while investigating, and issue formal rollback orders. Treasury Secretary Shultz said violators "will get clobbered."

The setup confers enormous power on the COLC's Dunlop. He has frank contempt for "magic numbers"; he once called the idea that all wage boosts should conform to a single numerical standard "hogwash." He prefers to weigh each case individually and relies on head-knocking by private negotiation rather than fiat by issuing orders.

Dunlop will have high-level help. The COLC will be advised by an elite committee of five union chiefs and five leaders of blue-ribbon corporations. Crusty AFL-CIO President Meany, who stormed off the Pay Board a year ago, has agreed to serve on the committee. So have Steelworkers President I.W. Abel, Teamsters President Frank Fitzsimmons, Seafarers President Paul Hall and UAW Chief Leonard Woodcock. The business members are Stephen Bechtel Jr., president of Bechtel Corp., a huge engineering and construction firm; Edward Carter, chairman of the Broadway-Hale department-store chain; R. Heath Larry, vice chairman of U.S. Steel; James Roche, retired chairman of General Motors; and Walter Wriston, chairman of New York's First National City Bank.

Empty Bins. The fact that so many prestigious union and corporate captains agreed to sit on the committee bodes well for the COLC, which will need considerable labor-management cooperation to make the new system work. Union leaders, who denounced Phase II for controlling pay more tightly than prices, have expressed cautious pleasure at the prospect of somewhat greater freedom in their wage negotiations. Business leaders were equally pleased by relaxation of the profit-margin rule. During Phase II, price increases were not permitted to push profit margins above the average for the best two of the three years preceding August 1971. This rule penalized efficient companies and those recovering from deep profit slumps; at the same time it encouraged unnecessary spending by companies trying to stay under the ceiling. Now the standard is the best two of the past four years. Executives can count in 1972, a year in which profit margins were rising.

What consumers think of Phase III will be determined above all by how fast food prices go up. Inability to hold them down was the great failure of Phase II. Propelled almost entirely by prices of farm products, which have never been controlled, wholesale prices overall in December alone rose an expensive 1.6%, the greatest increase since the Korean War. Now, at long last, the Administration is moving to attack food prices at the farm level.

The Administration is telling farmers to put back into production 40 million acres of grain and soybean land that they were required to keep idle last year in order to qualify for subsidy. The Government's own stocks of grain, formerly held off the market to support prices, will be sold. Except for an emergency reserve, says Shultz, "we expect to empty the bins." Farmers who have been holding wheat from past years under Government loans, gambling on a rise in prices, will have the loans called and be forced to sell. In addition, farmers will be permitted to graze livestock on land held out of grain planting.

The aim of all the measures is to push more grain onto the market at lower prices and encourage farmers to raise more meat animals. In the long run, that is probably the only way to keep food prices down--but the long run in this case may be painfully protracted. The Administration's new moves cannot prevent the present huge increases in wholesale prices from pushing up the bill at meat counters and bakery shelves in the next few months.

How well Phase III works will depend on the political will and economic skill of the men running it. The new program is flexible enough to allow Nixon, Shultz, Dunlop and their team to be as tough or as lenient as they choose. If the new looser system does not work, the President can always go back to more formal and rigid rules. The Economic Stabilization Act of 1970 authorizes Nixon to set up any kind of wage-price mechanism he wants. Last week, he asked Congress to make just one change in the law: striking out April 30, 1973, as the expiration date and substituting April 30, 1974.

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