Another Go at Guidelines

When Jimmy Carter moves into the Oval Office in January, one of his first tasks will be to send out a batch of invitations to the nation's labor chiefs and business leaders. They will be asked to come to the White House to help the Administration devise a set of guidelines for wage and price increases that the President will then urge unions and companies to follow. Though the guideline strategy had only limited success in the 1960s, Carter is committed to another go at it to help keep inflation down while hoping to stimulate the economy to faster, more sustained growth.

If the President-elect yet has any specific plans for guidelines, he is keeping them to himself. Nonetheless, his advisers are already debating where the limits might be set. Arthur Okun, a member of TIME'S Board of Economists who was involved with a previous set of guidelines when he was a member of Lyndon Johnson's Council of Economic Advisers, suggests that the White House might urge keeping wage boosts to 6% a year and price hikes to 4% (wages would be allowed to go up more than prices because some of the pay increases would presumably be offset by higher labor productivity). However, these standards would be flexible and would take into allowance such things as unusually low profit margins or the need for catch-up wage increases.

Peculiar Inflation. If successful, this approach would markedly lower the inflation rate. A 6% wage guideline would be 1 1/2 points lower than pay boosts have lately been averaging. As for prices, the consumer price index rose slightly less than 4% in October, but over the past year it has gone up 5.3%.

The need for guidelines arises, Carter's advisers believe, because the U.S. is now experiencing a peculiar sort of inflation by momentum. Prices, in their view, are not being pulled up by excess demand (the nation's factories are at present operating at only 74% of capacity). Rather, the inflationary spiral keeps spinning because everyone expects it to. As Okun wryly puts it, "Wages and prices are going up because they have been going up." So some type of Government action is needed to break the momentum, and Carter is opposed to outright controls. Though he once talked of asking Congress for power to impose controls, he now says he would do so only in an emergency--"and I don't anticipate any calamities."

Will the guideline strategy work? Carter is being well advised to seek cooperation in advance from the business and labor leaders he will later have to "jawbone" into following the guidelines, rather than simply announcing a set of rules without consultation. But he faces a tough selling job. Corporate executives fear that if they observe price guidelines, rising costs will cut into their profits. "I've talked with a lot of businessmen, and I have yet to find one who has a good word to say for [guidelines]," says an executive of Boise Cascade. But a minority are in favor. "Businessmen are now willing to get on the sidelines and help make Government economic policy work," says James Kerley, executive vice president of Monsanto.

Union leaders are wary of guidelines because they believe wages are monitored more closely than prices. "We are very, very leary," says AFL-CIO President George Meany. "Our experience has been that the employer becomes very civic-minded, very patriotic and says, 'No, I can't give you any more than a certain percentage.' " Moreover, when there are no guidelines, manufacturers are able to set high prices and union leaders are freer to strike for hefty settlements without arousing a public outcry or getting into an argument with the President. Without the Ford Administration committing itself one way or the other, 80,000 General Motors workers last week walked out of 16 plants for a few hours and won a settlement that GM called "the most expensive package" in the company's history.

For all that, guidelines in the past have succeeded--at times, for a while. Their history goes back to John F. Kennedy, who in 1962 established a system relating price and wage increases to worker productivity. The eventual guidelines: 3.2% a year for wages, zero average for prices. After Kennedy won a celebrated confrontation with steelmakers and got them to cancel a price boost, inflation rates stayed low until the Viet Nam War touched off a boom that overwhelmed the guidelines.

To conservative economists, the Viet Nam experience proves that guidelines are certain to fail. Banker Beryl Sprinkel, a member of TIME'S Board of Economists, believes that guidelines distort the normal give-and-take functioning of the economy and may actually contribute to inflation by encouraging unions and companies to push wages and prices up to the guideline limits. Nobel Laureate Milton Friedman has been more caustic: "Guideposts and pleas for voluntary compliance are halfway houses whose only merit is that they can more readily be abandoned than legally imposed controls."

Other economists, however, believe guidelines can work. Using econometric models of the 1960s, Williams College Economist John Sheahan concluded that "there was a convincing case that wage behavior in manufacturing became more restrained in the four years [after the establishment of the guideposts] than in the preceding decade." He drew upon independent studies by Harvard's Otto Eckstein and the Brookings Institution's George Perry.

No one, however, believes that guidelines can succeed if the Government overheats the economy by pumping in too much money. The White House cannot persuade unions and companies to obey guidelines in a boom atmosphere--but that is far from what the U.S. has today.

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