Guidelines: Down but Not Out

Depending on public opinion to curb the violators

Like a boxer rising groggily from a stunning roundhouse, a weakened Administration got back into the fight against inflation last week. It was time for some new tactics, since a federal judge had struck down President Carter's threat to withhold Government contracts from firms that breached his wage-price guidelines. The loss of the procurement sanction undercuts management's ability to resist granting powerful unions, already contemptuous of the guidelines, fat pay raises. A rash of big settlements for organized labor could also pull up wages for many nonunion workers, who are close to 60% of the work force, and put an even faster spin on the price spiral.

White House economic advisers tirelessly insist that the guidelines can still be made to work through the force of public opinion. Though Treasury Secretary Michael Blumenthal agreed that the guidelines would have to be "reviewed and updated," there are marked differ- ences within the Administration on short-term anti-inflation policy. Alfred Kahn, the Administration's chief inflation adviser, is urging the President to press a dramatic policy that would ask Congress for legislative ratification of the standards, deny federal business to companies violating the guidelines, and require 90-day prenotification on any important pay or price changes. But the President is most likely to follow the course recommended by Blumenthal and Chief Economist Charles Schultze: leave the 7% pay limit intact, and generally follow a moderate policy, while hoping that the coming (or perhaps already existing) recession will dampen inflationary fires. Asserted Blumenthal: "We are determined not to engage in dramatic action that would cause long-run problems."

Amid all this uncertainty, the Administration got a rare piece of good news on inflation. May's wholesale prices rose a modest .4%, vs. .9% in April, the smallest increase in nine months. The main reason: a drop in food prices, including beef, because of a decline in consumption. But food prices may resume their rise because crop-killing rains in the Midwest could tighten supplies of corn and wheat, and OPEC's continuing oil price rises will further fire up inflation.

A main hope of Washington's inflation fighters is that the United Rubber Workers, who are striking Uniroyal for an industry-wide settlement, eventually will accept a pay increase reasonably close to 7% annually. The U.R.W., which resumed negotiations last week, is seeking a three-year settlement of between 33% and 36%. No end of the strike is in sight.

The year's most critical negotiations will begin in mid-July when the United Auto Workers, whose contract expires Sept. 14, sit down with representatives of General Motors to fashion an industrywide settlement. No one is ruling out a strike. U.A.W. President Douglas Fraser, who initially supported the guidelines, has been talking tougher as negotiations near. Among other things, the union will seek a sweeter COLA and a shorter work week to ensure job security for more workers.

Rich settlements for Big Labor can only widen the pay gap between its members, who have been gaining increases of 8 1/2% to 9% so far this year, and nonunion workers, who have been getting wage-and-benefit increases averaging 7 1/2%. Says Economist Audrey Freedman of the Conference Board, a private research group: "Managers who want to hold on to their best people are getting very uncomfortable with the disparity in pay between union and nonunion workers." Adds Economist Robert Nathan, a Washington consultant who has close ties to labor: "If unions' increases continue to be large, it is only a matter of time before nonunion workers' pay will go up."

It is important to keep wages reasonable, but that alone will not stifle inflation. As Blumenthal noted last week, the main sources of that spiral are food, fuel and housing costs--none of which are covered by the guidelines. Thus the best thing the White House can do is to keep punching, take advantage of lucky breaks and hope that the slowdown will arrive in time to avoid any more radical, and risky, approaches.

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