A Stage Two with Teeth?

Some possibilities: guidelines--pardon, standards--and more budget cuts

Though the U.S. inflation rate has slowed a bit from its double-digit pace of the second quarter--wholesale prices actually dropped a trifle in August--President Carter and his economic advisers are under no illusion that they can claim any credit. Quite the contrary: consumer prices for the year are likely to rise 8% or even more, and the Administration is feeling public fury. As S. Lee Kling, chief deputy to Anti-Inflation Czar Robert Strauss, told fellow policymakers on returning from a trip, "You guys wouldn't believe what's happening out there. They're barely polite to me in St. Louis. They're throwing eggs at me in Atlanta. People are really riled up."

So Carter's economic-policy team has begun making final recommendations for a Stage Two anti-inflation program. Aides aim to put on the President's desk late this week specific proposals for tougher measures to follow up the ineffective ones that Carter announced last April. The likely centerpiece: a set of specific standards that labor and industry will be asked to follow when raising wages and prices--possibly backed by the threat of federal penalties against violators.

Some advisers want the President to launch Stage Two with a major speech before month's end, possibly in a talk to the Steelworkers Union on Sept. 19. Both the timing and content of Stage Two will be decided by Carter himself, and as usual he is getting conflicting advice. Treasury Secretary Michael Blumenthal and Federal Reserve Board Chairman William Miller want him to start a tough program immediately. Vice President Walter Mondale and some other advisers also favor a strong program--but after the November congressional elections. A third group, including Domestic Policy Director Stuart Eizenstat, wants a relatively mild program, because a hard one would hurt Carter with labor and minority groups.

An interagency committee in July began examining alternatives short of wage-price controls, which Carter himself last week again ruled out. The White House has also forbidden "guidelines"--but only the word, which is anathema to businessmen and union leaders. The concept, renamed "standards" or "trigger points," is one of the hottest prospects for Stage Two.

Carter's advisers fear that the 1979 negotiations in the trucking, auto and construction industries will lock the economy into a cycle of 10% wage and benefit boosts in each of the next three years, to be followed by jarring price rises. The President has exhorted workers and managers to hold wage-price increases below the average for the past two years, but aides now think that the "deceleration" program is too vague. Many want Carter to urge that all wage settlements be held to 8% or less.

The price guideli--, er, standards might vary from company to company. One idea is to demand that each company raise prices 1% to 1.5% less than it did last year.

The standards would be voluntary, in the sense that no one would be fined or jailed for flouting them. But Administration inflation hawks are discussing other ways to dun the disobedient. The most obvious is to withhold federal contracts from companies that violate the standards. Some other ideas: lean on the Interstate Commerce Commission to reject any rate increases that truck lines might seek in order to pay for a high settlement with the Teamsters; let in more lower-cost imported steel if American mills raise prices too much. Government officials are talking about administering the 1931 Davis-Bacon Act in a way that would hold construction wages down rather than pushing them up. The act commands that contractors pay the "prevailing" area wage on federally aided construction jobs, but gives the Administration wide latitude in defining what that prevailing wage is.

Many businessmen and economists believe that any guidelines program would deal only with the symptoms of inflation and not its root causes, notably bulging deficits and a too-rapid expansion of the U.S. money supply. But the Federal Reserve lately has been making progress in reducing money growth toward Miller's goal of an annual rate no higher than 6.5%, and Stage Two will include a new round of budget cutting. The Senate Budget Committee last week voted to set a $42.3 billion ceiling on the federal deficit for fiscal 1979, which starts Oct. 1. That would be well down from the $51.1 billion deficit in the fiscal year now ending, and the $60.6 billion that Carter recommended in January.

The reduction so far reflects mostly a scaling down of income tax cuts planned for next year and the continuing inability of federal agencies to spend money as fast as they are authorized to, rather than any determined slashing of programs. An Administration "hit team" is now examining the 1979 budget line by line, looking for places to cut. Jack Carlson, chief economist of the U.S. Chamber of Commerce, figures that they expect that it will eventually squeeze the deficit to about $35 billion.

Another idea is to delay for a year increases in the federal minimum wage--from $2.65 an hour to $2.90--and in Social Security taxes scheduled for January. Miller last week urged Congress to do just that, and he has allies in the Administration who calculate that the delays would knock a full percentage point off next year's inflation rate. But the delays would so anger-labor and old people that the Administration is not expected to ask for them. Most likely it will merely pass the word that it is not opposed to delays and hope that this signal will be enough to move Congress to act.

A final possibility is TIP (for Tax-based Incomes Policy). This is a long discussed plan either to impose penalty taxes on employers who raise wages too much, or to give tax cuts to workers and companies who keep wage and price boosts moderate (see box). Carter may introduce a TIP plan in the next session of Congress.

Ultimately, what happens in Stage Two depends on how much political heat Carter is willing to take. All the proposals his advisers are mulling over would draw outraged screams, at least at first. Yet the President has a strong incentive to act. Changes in economic policy often take a good two years to produce results clear enough for the public to see. So what Carter does this year will determine what voters think of the economy on Election Day, 1980. .

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