Phase III on the Rocks
GLASS, ANDREW J.
Washington-USA PHASE III ON THE ROCKS BY ANDREW J. GLASS Washington Pressures are mounting on President Nixon to take action against rising prices. Some of his aides, in fact, think the time has...
...Medicine men are nearly powerless, though, against the demand-pull variety of inflation...
...But there is even a weak spot here...
...In contrast to the classic "demand-pull" inflation that occurs whenever excess demand chases a scarcity of goods or services, forcing potential buyers to bid up prices against each other, the 1971 spiral was being propelled by a "cost-push" cycle...
...To sea...
...Moreover, imports often set ceilings on domestic prices...
...At the time government controls first went into effect, just over a year and a half ago, more than a quarter of the American industrial machine was idle...
...Doing away with the Pay Board, of course, meant the Price Commission had to go as well...
...The foundation upon which the unions have built is collective bargaining...
...Nixon believes that the key to success—whether in politics or economics—is good timing...
...So rather than attempt to educate and refine, he scrapped Phase II before the crunch posed seemingly insurmountable difficulties...
...Labor's basic problem with the Pay Board was not the size of the wage-and-fringe packages it permitted—though they were never as generous as the union leaders wished—but rather the intervention process itself...
...As part of a deal Nixon made with the farmers in 1971...
...Under the Phase II formula, firms that raised prices before the 1971 freeze were not as badly hurt as those that heeded Administration pleas and behaved with some restraint...
...Billions of dollars were dumped on the international money exchanges, forcing Nixon to swallow a 10 per cent devaluation that, through a deft stroke of public relations, was made to look like a plus and not a minus...
...the bargain, Shultz met with AFL-CIO President George Meany in Florida, while Peter J. Brennan, head of the New York Building and Construction Trades Council, was appointed to replace James D. Hodgson as Secretary of Labor...
...He did clamp lids on retail meat prices (directly) and bank interest rates (indirectly), but these moves were aimed more at defusing congressional opposition than at coming to grips with the economy...
...By doing away with them altogether, Nixon effectively restricted the options open to the lawmakers...
...An all-out Administration campaign to hold down prices merely resulted in back-room agreements, under-the-table payments and other dirty dealings...
...all that was needed, really, was for the economic doctors to seat themselves firmly on both ends of the see-saw...
...To the extent Phase II guidelines and rollbacks undermined that concept, labor feared, quite rightly, that the fundamental rationale for its existence was under attack...
...believing he would need their support in a close election, food prices had been exempted from Phase II...
...Their former opposition to the Republican Administration was based on economic and class lines that they felt were losing validity...
...His quid pro quo from labor was to be relative peace on the strike front, with Meany and Brennan doing their best to moderate wage demands by the affiliated unions—no easy task...
...Nonetheless, the proposition that White House economic policy is dictated by the President's power struggle with Congress is only half of the story: Phase III is based on a curious mixture of administrative cynicism, political opportunism, moral Calvinism, and sound economics...
...And as the White House unhappily realizes, the lesson has been learned all too well...
...The White House economic team anticipated a "bubble" in nonagri-cultural prices but, since it discounted the political and economic effects as a nonrecurrent problem, it concentrated on the runaway food sector, the source of the loudest consumer complaints...
...As a second step, the stick probably will be brought out of the closet...
...Once the President scrapped the Price Commission, the bureaucratic paperwork that had slowed price increases— some said deliberately—quickly vanished...
...As a byproduct, Nixon achieved a broader political alliance than he had previously thought possible with those segments of organized labor that had wanted nothing to do with George McGovern...
...Yet the evidence suggests that Phase II, despite its continuing popularity, was already headed for the rocks when the Administration decided to do away with it...
...The rollback, for the offender, could be quite severe...
...The President displayed his sensitivity to the situation...
...The medicine administered by Washington proved strong enough to dampen the cost-push cycle in the industrial sector...
...The President has therefore approved only limited countermeasures to the latest spurt of inflation...
...He doubts there is much political wallop left in another freeze, and he knows it would brand his current course as a failure without settling any basic problems...
...In the end, the President may be forced to set industry ceilings for both business and labor...
...Under Phase II it took an average of four-six months before a given major corporation could implement a patently justified price increase...
...The notion of reimposing a temporary freeze on prices, wages and rents does not interest him...
...No one bothered to point out that the devaluation was also highly inflationary, raising the cost of goods from abroad, as well as many U.S...
...Yet other interests may view rollbacks as a bit of rotten luck, something akin to having the IRS man pick out your tax return for a complete audit...
...By January 1973 industrial output zoomed into the 85-90 per cent of capacity range, where it becomes increasingly inefficient to produce more by harnessing antequated machines and paying workers overtime rates...
...The process remained relatively insulated from any recessionary pressures...
...The sound aspects of Phase III are not readily apparent, in part because Nixon and his chief economic mentor, Treasury Secretary George Shultz, have typically chosen to shun the real issues in public...
...Indeed, a goodly number of firms that had been weighing whether to ask the commission for more (and face adverse publicity if they were challenged) immediately plunged ahead...
...That was shown early in the game when the lumber industry, caught in the throes of a housing boom and unprecedented exports to Japan, could not sufficiently raise production...
...consequently, he refuses to have his hand forced...
...But if the boom continues, corporations will treat the higher rates as still another cost of doing business, to be passed on, which will hardly halt inflation...
...Thus the expiration date of the Economic Stabilization Act, April 30, was much on the President's mind last January 11, when he scuttled the Phase II program and replaced it with the amorphous voluntarism plus the stick-in-the-closet of Phase III...
...Overnight a given company could push up its prices...
...Some of his aides, in fact, think the time has come for bold steps that would check inflation and disarm the growing band of Nixon economic critics...
...Unfortunately, the Administration's confidence that industrial and consumer prices will eventually fall, or at least flatten out, was not shared by the world economic community (including, notably, U.S.-con-trolled multinational corporations and international banks...
...This, White House staffers told each other, might at least improve the tone of the business community...
...He recognized that so long as the Pay Board and Price Commission functioned, a hostile Democratic majority could easily revise the law to make these agencies more responsive to the congressional will...
...The altogether predictable result was that in March the wholesale price index for all items (excluding food) shot upwards at an annual rate of 14.4 per cent...
...Apparently, the President calculated that most Americans would not comprehend why his once-vaunted controls program suddenly found itself in trouble...
...Major employers had signed generous settlements with their unions and passed the costs of the wage packages—and then some—on to the consumer...
...Within the White House, however, political alarm bells are going off all the time...
...products containing foreign components...
...In general, Nixon's 1973 economic policies have been based on the short-term political goal of retaining as free a hand as possible...
...The most likely target: any industry that signs an inflationary labor settlement and quickly raises prices...
...For although price increases had been held below 3 per cent in the nonfood sector, corporation executives were finding it convenient, if not downright cozy, to shift their pricing decisions over to the government...
...Within government councils, the lumber situation was seen as a bitter precursor of things to come...
...If inflation fails to abate soon, the President's options will narrow...
...Outwardly, the Administration has responded to such ghastly statistics with unruffled calm...
...So far this year consumer prices have been soaring at an annual rate of 12 per cent...
...In a less justified case, or in a sensitive industry, the time required was much longer...
...when imports cost more, the ceiling is eroded...
...As a first step, he will press the Federal Reserve Board to push interest rates up to European and Japanese levels...
...In the meantime, the marketplace continues to be ruled by the Nixon decisions of 1971-72...
...The impact of the Administration's belated actions to bring grocery costs down will not be felt until early 1974...
...But here there was no quid pro quo and prices took off...
Vol. 56 • April 1973 • No. 9
