Connolly's New Toughness

Connally's New Toughness

Despite withering fire from critics outside the Administration, Treasury Secretary George Shultz, President Nixon's economic coordinator, has remained imperturbably committed to the flaccid wage-price controls of Phase III, which he largely formulated. Lately, though, Shultz and his chief supporter, Herbert Stein, chairman of the Council of Economic Advisers, have been under increasing pressure from within the Administration itself to take a more vigorous--and visible--stand against soaring prices. Leading the push is former Treasury Secretary John Connally, now a White House consultant. His position has the strong backing of Federal Reserve Chairman Arthur Burns, who has been pressing the same point for months.

Last week the scales seemed to be tipping in Connally's favor. Despite President Nixon's solemn campaign pledge to the contrary, the White House let it be known that it is considering seeking some sort of tax increase to slow the runaway pace of the economy. At the same time there were strong indications that the Administration will shift back to much sterner price controls, possibly within the next two weeks.

Shultz himself announced last week that the Administration might ask Congress to increase the federal tax on gasoline, though he stressed that no firm decision has been made. Most estimates put the proposed hike at about 50 a gallon, which would more than double the present 40 levy. That big a boost would siphon about $5 billion in additional tax revenues out of the economy and produce a budget surplus in the 1974 fiscal year, starting July 1. Such a measure would meet formidable opposition in Congress. But a gas-tax hike is only one of the Administration's fiscal alternatives. Another option is a temporary income tax surcharge, which could be easily and quickly removed next year when the economy might well be sluggish and in need of stimulus.

Administration sources also revealed last week that plans to readopt some of the mandatory controls of Phase II within the next few weeks are now all but completed. Just how far the Administration might go, even if Connally wins the policy fight, is not yet clear. At an extreme, the Government could once again require big corporations to get advance approval for price boosts. It also could reimpose some of the penalties that were slapped on price gougers during Phase II--for example, forcing them to make refunds to customers. At present, corporations are supposed to follow price guidelines, but enforcement is mostly voluntary; only the 650 largest corporations are required to notify the Cost of Living Council in advance of large price boosts that they plan, and they can go ahead if the COLC does nothing, subject to no penalty greater than an eventual rollback. Even these loose controls have been less than vigorously enforced. Some Internal Revenue Service officers, who are charged with enforcing price policy, complain that many reports of violations that they have made to the COLC have gone unheeded.

Connally, an ambitious politician more attuned to public-opinion nuance than economic nicety, believes that the present anti-inflation policies are simply too pallid to satisfy consumers riled about rising prices. As Treasury Secretary in 1971, Connally won Nixon's admiration by urging the relatively successful wage-price freeze. Since his appointment to the White House last month, Connally, a new convert to Republicanism, has again been prodding the President to make a greater show of leadership by stiffening controls and fiscal policy. Burns is taking the same line out of fear that otherwise the Federal Reserve will have to carry the entire burden of fighting inflation by keeping a dangerously tight rein on the money supply. Last week even generally loyal Senate Republican Leader Hugh Scott declared that if the Administration fails to act, he might support congressional action to tighten controls.

The final decision rests with Nixon. But as in all aspects of government today, the Watergate revelations are complicating the discussions. If the President follows the advice of Connally and Burns, in effect repudiating present policy, he risks the resignations of Shultz and Stein. Neither man cares much for Connally, and his re-emergence as a major economic policymaker would be professionally and personally galling to both. And as the President well knows, at a time when scandals emanating from the White House have hampered recruitment for top Government posts, finding replacements for officials of the caliber of Shultz and Stein could pose a serious problem.

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