The Tepid Temptation of TIP

If wage-price controls are unworkable, and presidential jawboning too easy to defy, and balancing the budget takes too long, and tight money threatens recession, what is left to fight inflation? The answer, Washington officials are reluctantly concluding, just might be to use income taxes as a stick to beat or a carrot to lure workers and companies into holding wages and prices down.

The Senate Banking Committee staff is drafting such a Tax-based Incomes Policy (TIP) bill, which Chairman William Proxmire plans to introduce late this year or early next. Meanwhile, some Treasury and Internal Revenue Service staffers were ordered to cancel summer vacations and study what kind of TIP plan the Carter Administration might propose. Explains Lyle Gramley, a member of the Council of Economic Advisers: "TIP is becoming more attractive simply because the other alternatives aren't much better or they're not working."

That policymakers are being even so tepidly tempted constitutes an intellectual victory for Federal Reserve Governor Henry Wallich, who has been pushing TIP through nearly eight years of debate in obscure economic journals. His basic idea, elaborated in cooperation with University of Pennsylvania Economist Sidney Weintraub, is to set a guideline for wage and benefit increases--about 5% a year in Wallich's latest version--and slap a penalty tax on any company that raised pay as much as 1% more. In his view, that would force employers to hold down wages, and prices would automatically follow.

Even some sympathizers think labor will never buy his plan, and so last year Arthur Okun, a member of TIME'S Board of Economists, proposed a variant: cuts in income taxes for both companies and their workers if wage increases are held to 6% and price boosts to 4%. Proxmire's bill would authorize the Administration to try either type of TIP.

Both are denounced by conservatives who oppose any interference in the free market. Government officials' main fear is that a monstrous bureaucracy would be needed to monitor hundreds of thousands of wage and price boosts. For that reason, the Administration favors Wallich's TIP over Okun's: watching just wages would be easier than keeping tabs on prices too. Weintraub suggests that policing could be simplified by confining TIP penalties to the 2,000 or so biggest U.S. companies.

TIP, reports TIME Economic Correspondent George Taber, seems a strangely radical idea to come from Wallich, a Republican professor of economics whose pin-striped blue suits and slow, heavily technical speech make him seem the embodiment of fiscal traditionalism. But as a child in Berlin he lived through the insane German inflation of 1923-24. Once his mother gave him 105 billion marks to buy a ticket to a swimming pool that had cost 15 pfennig to enter not long before. But she miscalculated; by the time Wallich got to the pool, the price had risen to 150 billion marks, and he could not get in. Today at 64 Wallich regards inflation as not just an economic but a moral outrage. Says he: "Inflation is like a country where nobody speaks the truth. Everybody makes contracts knowing perfectly well that they will not be kept in terms of constant values. This condition is hard to reconcile with simple honesty."

Patient and pleasant, Wallich is nonetheless something of a fighter. When Federal Reserve Chairman G. William Miller tried to ban smoking at board meetings, Wallich went on puffing his ever present cigar or pipe and threatened to deposit the ashes in his pants cuffs if Miller would not provide ashtrays; the Fed chief did, reluctantly. The same determination has carried TIP from the status of an academic curiosity to a plan familiar enough that it inspires what pass for jokes in economic circles. Latest: it should be renamed Tax-Related Incomes Policy, so that it would promise the hip crowd a euphoric TRIP.

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