How Is Phase II Working?

AT a recent Teamsters meeting in Chicago, some 600 members were asked to raise their hands if they believed that prices were still going up. In a snap, almost everyone in the room lifted his arm. That response typified a growing national doubt about Phase II, the post-freeze part of President Nixon's anti-inflation program. Housewives can invariably cite vexing increases in food prices, especially in produce and meat. Scarcely a week goes by that the Price Commission does not make some exemptions; last week, for example, it exempted nonprofit private schools from adhering to the guidelines for tuition and room-and-board charges. There are no effective limits on many other costs, including local taxes, used-car prices and utility rates. Says a construction worker in New York City, where since Jan. 1 telephone rates have gone up 9%, subway fares 17% and state income taxes 2.5%: "The stores might as well forget about price controls. The way things are going, we're not going to have enough money left to buy anything anyway."

The cynicism also applies to Phase II's wage guidelines. Last week the Pay Board continued knuckling under to strong unions by approving most of a contract that would provide some 180,000 railroad workers with wage and benefit increases of 42% over 42 months. The settlement once again makes a mockery of the official guideline of 5.5%, although not quite so badly as in some previous cases. The conductors, firemen and brakemen agreed to changes in a long list of make-work rules that will substantially increase productivity, thus fulfilling one of the few valid criteria for seeking pay raises above the guidelines.

Campaign Issue. Yet for all the well-publicized wage settlements that badly break the rules, millions of non-union workers--including many highly paid professionals and executives--feel that their employers are only too willing to hold pay increases to the guideline, or less. Democratic presidential candidates have already begun to make the question of equity in Phase II a campaign issue. Says Senator Edmund Muskie: "There is reason to believe that the total effect of the program is less on prices than on wages, and there is going to be an eye raised as to the credibility of it."

Despite the popular disillusionment with Phase II, many economists and businessmen believe that the program is generally pushing ahead toward its goal: to slow inflation--not stop it cold. Says Ray Jallow, economist for the United California Bank: "Without the program, inflation for the first quarter of 1972 would have been 4% or 5%; most likely, inflation will instead be kept at about 3% for the first quarter." Adds Arthur Okun, a member of TIME'S Board of Economists and adviser to several Democratic presidential contenders: "So far, I grade Phase II at a solid B."

It is still too early to say whether Phase II will ultimately succeed. Price Commission Chairman C. Jackson Grayson Jr. believes that the first reliable score sheet will not be available until April or May, when economic trends for the entire first quarter become clear. He concedes that for the moment at least, the program is far from popular. People often remember headlines about egregious jumps but forget news of real accomplishments. For example, giant companies, including Du Pont, Olin, Dow Chemical, PPG Industries and many others, have agreed to hold price increases to 2% or less this year. Hoping to burnish the image of Phase II, Grayson and his staff will visit several cities beginning in March to explain price policy to business and consumer leaders.

Their toughest job will be to correct public misunderstanding, much of which was needlessly created in the rush to get Phase II under way in November. For example, by dividing employee units and businesses into three distinct "tiers," each of which falls under separate rules for reporting pay or price hikes, the Administration left the impression that Phase II covers everything. In fact, post-freeze controls were never intended to apply to each paycheck or all price tags, and most economists applaud the recent decisions of Phase II agencies exempting most small businesses from the guidelines. The Pay Board has also tightened up on its operation, giving Chairman George Boldt authority to decide on all but the most important settlements by himself.

Increasingly, Phase II regulators will concentrate on the biggest unions and corporations. Because they are so powerful, these giants largely determine what is charged for goods and labor in the U.S. If they can be persuaded--or pressured--to hold down prices and wages, then the rest of the economy should fall into line without the need of rigid, thorough controls and a great new bureaucracy. Small companies or unions can hardly survive if they dare to post higher prices than huge competitors. As a result, Boldt was able to clear away 122 applications (out of a total backlog of 1,000) in a single week.

Stricter Sam. There are sound reasons why the Government does not control the rising costs of all items. The prices of perishable foods fluctuate according to the climate and growing cycles. Washington lacks the legal power to order states and municipalities to limit tax increases. If restive taxpayers want to hold down that bill, they have to express their wishes at the ballot box. The President has enhanced Phase II's chances for success by abandoning early hints that the controls may be dropped in the near future. Last week, in his annual economic message to Congress, he strongly implied that they will remain in effect at least through this year. Nixon and his advisers could further help by making clearer to the nation what Phase II really is--and is not. As Economist Okun points out, many people were led to expect too much, and now they "are convinced that Uncle Sam is not living up to his commitment." In fact, provided he really keeps the controls in effect for as long as they are necessary, the increasingly stricter Uncle Sam of Phase II will probably do a markedly better job with the economy than he did before Aug. 15.

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