Anatomy of an Inchback

During a week of continued trouble for the U.S. economy (see box), President Ford's fledgling anti-inflation program won one small psychological victory. In a surprise return to old-style jawboning, the President, on the fourth day of his Administration, had rebuked General Motors for announcing price increases on 1975 model cars averaging a sizzling 9.6%, or about $480 an auto. For a while it seemed that he would be ignored. But last week, after ten days of public stonewalling, the world's largest automaker grudgingly relented--at least a bit.

GM shaved $64 off the scheduled boost. That left the rise at a still substantial--and probably unprecedented --$416 a car. The popular Chevy Vega, an economy car, wul go up $294 to around $2,800--25% more than at the start of the 1974 model year. Still, GM's action was enough to stop heavy hints from Ford Motors and Chrysler that they might raise prices even more than GM had. Now, both companies will probably limit their increases.

Officially, the President pronounced himself "encouraged" by GM's mini-rollback. "I am confident," he said, "that this action will be but one of many examples of restraint by management and labor." Unofficially, Ford's economic advisers breathed a sigh of relief. In their view, the Chief Executive had taken an uncalculated, ill-informed risk that unnecessarily put his prestige on the line when the nation's economic woes could least afford a blow to the new Administration's credibility. It is clear that GM recanted mainly to get the new President off the hook.

The events leading to GM's decision began in the final hours of the Nixon Administration. GM Executive Vice President Oscar Lundin and Vice President Henry Welch flew to Washington on Aug. 8--the day of Nixon's resignation speech--for a meeting with Herbert Stein, chairman of the Council of Economic Advisers, and Kenneth Rush, Economic Counsellor to the President. Following a decade-old GM practice, they came to give advance notice of the scheduled increase and explain why, in GM's view, it was justified.

Sixth in a Year. Stein and Rush were not happy; the increase would be the sixth for the company since September 1973, and the third since April, when price controls were lifted. But they confined themselves to general talk about the need for price restraint; "I neither approved nor disapproved" of GM's specific plans, says Rush. If Rush had voiced any explicit criticism, says a GM source, then some 13,000 letters that went out later that day announcing the increase to GM dealers might not have been mailed. "The board," he says, "would have had a decision to make about it."

GM broke the news to the public the next day--when most of the nation could think of nothing but Nixon's farewell and Ford's Inauguration speech. White House press aides nonetheless began wondering what to say if reporters at a Saturday briefing asked what the new President thought about the GM increase. The question did not come up. But on Monday, Aug. 12, Press Secretary J.F. terHorst released a statement by Ford, expressing "disappointment" at the size of the increase. Ford apparently acted alone. None of his economic advisers were consulted, and nobody stopped to ask what the White House should do if GM was unmoved.

Stunned GM executives learned of the President's disapproval by reading the Dow Jones news ticker. Lundin hurriedly phoned Rush to tell him what he had conveyed the previous week: the increase was justified by higher labor and materials costs. GM's first-half profit margin had dwindled to 2.8% of sales, v. 8.4% hi 1973.

Nobody in the Administration had analyzed the information supplied by GM to see how large an increase really would be justified. (This is a tricky exercise at best and depends largely on how many cars the public can be expected to buy; the cost of making each car drops sharply as more are produced.) Lundin followed up hi a letter on Tuesday, repeating the figures but hinting at a willingness to talk further.

Rush then phoned an old friend:

James Roche, retired chairman of GM and still a power on the company's twelve-man finance committee. The two had known each other as fellow big-businessmen when Rush was president of Union Carbide; later, after Rush became Deputy Secretary of Defense,

Roche served on a committee that studied U.S. reserve forces. Rush's implicit message: Give the President a break.

Publicly, GM indicated that it would stick by its increase. But behind the scenes, the finance committee, led by Roche, put its staff to work to see where cuts could be made. One nibble: make antipollution catalytic converters available to dealers at GM's cost of $111, eliminating a possible $19 profit. Finally, Lundin and Welch flew again to Washington on Tuesday last week, to consult with Rush and tell him that an announcement would be made the next day. GM Chairman Richard Gerstenberg then disclosed the $64 backdown in a sometimes petulant statement. "If every industry had a price record equal to that of the automobile industry," he said, "the nation's inflation problem would be solved."

Trucks Up. It was a great deal less than a famous victory, for Ford or for consumers. GM got most of what it wanted: it announced that it will raise truck prices by 10.9%, or an average $624 per vehicle--that is 1.3% more than it first intended. The company claimed the larger boost on trucks will not offset the $64 backdown on cars. Gerstenberg has offered no assurance against a second rise on cars later on; GM, he said, is still absorbing cost increases of $400 a car that have built up over the past three years. Even the present shaved-down increase will be painful to motorists. Still, President Ford escaped a potentially damaging defeat and may have learned a lesson. His advisers are now cautioning him: If further jawboning of individual companies seems necessary, don't do it yourself.

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