War on Inflation: Stage II

That flicker of a grin, so often at odds with the import of his words, had disappeared. That Southern lilt, so often muffling the ends of sentences, was almost gone. As President Carter appeared on prime-time television last week to proclaim and explain the long-awaited Stage II of his campaign to slow the inflation that has reached an annual rate of 10%, his manner and delivery befitted the solemnity of his subject. Seated at his Oval Office desk and reading from a prompter, the President vowed to try "to arouse our nation to join me" in the long-range fight.

One problem in Carter's effort to dramatize his program was that much of it had already leaked out. There had been divisions within his Administration over how tough a stand to take, and when to take it. And as a decision was being reached, final work was repeatedly delayed, first by the Egyptian-Israeli talks at Camp David, then by the frenetic end of the congressional session. Other leaks had sprung from the Administration's commendable efforts to brief key leaders in Congress, business and labor, as well as reporters, on what the program would require. The advance disclosures placed a large burden on Carter's capacity for rhetoric. As one aide put it: "How the President sounds will be as important as anything we put into this program."

The President is hardly a natural orator, but he made a good try. Through the typewriter of Chief Speechwriter James Fallows, Carter's text had undergone seven drafts. Checking a tendency toward overstatement, Carter deliberately adopted a cautious, realistic, even humble, attitude toward his struggle with inflation. "I do not have all the answers," he admitted. "Nobody does." He conceded frankly: "We have tried to control it, but we have not been successful." His new policy, he said, "is almost certain not to succeed if success means quick or dramatic changes. A long-term disease requires long-term treatment." But he pleaded: "It is up to us to make the improvements we can, even at the risk of partial failure, rather than to ensure failure by not trying at all."

Considering the complexity of both the problem and his plans to solve it, Carter's explanation was quite clear. He contended, perhaps a bit simplistically, that he faced only three alternatives: 1) to impose mandatory wage and price controls, which business and some union leaders abhor; 2) to induce a recession, which might reduce inflation but only at the cost of high unemployment and lower business profits; and 3) to set voluntary wage and price guidelines, with the Government using whatever levers of persuasion and economic pressure it can to see that they are observed.

Since the President lacks the authority to impose controls, and Congress is unlikely to give him such power unless inflation becomes much worse, Carter considered only the third course to be practical. As predicted, his plan set a limit of 7% on total wage increases, including fringe benefits. (Wage raises this year are running at a rate of 8.7% including fringes.) The limit will not apply to those workers earning less than $4 an hour, and exceptions may be made for employees who can show that they have markedly increased their productivity. The plan is not meant to limit raises for each individual worker but applies to the total wage increases given to groups of workers covered by a union contract and to managerial employees as a class.

The one surprise in the President's announcement was a novel provision for a "wage insurance policy" under which those workers whose wage raises are held below 7% in a given year would get a tax rebate if inflation rose more than 7% in that year. This rebate plan was first suggested by Arthur Okun, a member of TIME'S Board of Economists, and was pushed by Charles Schultze, a friend of Okun's and now chairman of the President's Council of Economic Advisers. It must be approved by Congress before it can go into effect. Carter contended that for workers it "will remove their only legitimate reason not to cooperate" with his program.

On prices, also as predicted, Carter's plan sets a nationwide rate of 6% to 6 1/2% in annual increases as the "target." (The current rate: about 8.25%.) Each company is asked to hold increases to at least one half of a percentage point below the average of the increases that it levied during 1976 and 1977. (Landlords, hospitals and colleges are supposed to meet this standard too.) A company may increase prices above that rate on products but must not let the average increase on all of its products exceed the limit. There is one big exception: food prices are exempt from the guidelines, since they vary so erratically with the vagaries of weather, disease and insects. Apart from that, however, Carter urged full compliance. Said he: "Every business, every union, every professional group, every individual in this country has no excuse not to adhere to these standards. If we meet these standards, the real buying power of your paycheck will rise."

The President was less clear on what will happen to those unions or companies that ignore the guidelines. "I cannot stop an irresponsible corporation from raising its prices," he admitted, "or a selfish group of employees from using its power to demand excessive wages. But if that happens, the Government will respond--using the tools of Government authority and public opinion."

Carter is enlarging the Council on Wage and Price Stability to monitor major wage contracts and the price increases set by large corporations, and offenders will suffer at least a public scolding. Firms doing business with the Government will have to sign agreements to comply with the standards when they get new contracts. Although Carter said that these contracts involve $80 billion in Government purchases each year, so many of them involve untouchable priority items, such as defense purchases, that the Government actually has leverage over only some $20 billion in new contracts each year. Still another veiled threat came when Carter warned that he intended to "put competition back into the American free enterprise system." His implication was that companies now getting special Government protection, like limitations on imports, might lose that protection if they do not observe the price guidelines. Warned Schultze about the enforcement tactics: "We'll let the punishment fit the crime."

While wage and price guidelines attracted the most attention, Carter was well aware of the complaint by businessmen and some economists that the Federal Government is the biggest single contributor to inflation. With pride, he pointed out that his Administration had reduced the federal budget deficit, a prime contributor to inflation, from $66 billion in Gerald Ford's last year as President, to less than $40 billion in the current fiscal year. He pledged to cut it to "$30 billion or less" next year. As part of the effort to do so, he said he would veto any plan for any income tax cut beyond the $18.7 billion slash recently enacted by Congress, even though "tax reduction has never been more politically popular than it is today."

He also promised to hold down Government spending, partly by cutting 20,000 workers from federal payrolls through attrition; to keep a 5 1/2% limit on pay raises for federal employees; and to permit no pay increase at all this year for Government executives. Carter noted that he had already used his veto to stop inflationary spending proposed by Congress and would not hesitate to do so again. "We must face a time of national austerity," he said. "Hard choices are necessary if we want to avoid consequences that are even worse."

The President offered one other provision to encourage the cooperation of business leaders: a reduction in unnecessary federal regulations that add to company costs. He cited his deregulation of the airline industry as an example. Yet he did not by any means promise total freedom from Government supervision. "Where regulations are essential, they must be efficient," he said. "Where they fight inflation, they should be encouraged. Where they are unnecessary, they should be removed."

Next day, deliberately delaying the announcement for maximum press attention, Carter appointed Civil Aeronautics Board Chairman Alfred Kahn, a hero in the airline deregulation push, to head his new anti-inflation drive (see box). How did the arrival of Kahn impress Carter's team of economic advisers? Said Schultze: "I feel like Churchill must have felt when he heard that the Americans were entering World War II."

The initial reaction to the speech, and the plan, was far from encouraging. Corporate money managers, bankers and speculators, apparently believing that Stage II is too weak and will not work, sent the dollar plunging. The greenback fell to its lowest exchange rate since World War II against the yen, the deutsche mark, the guilder, the Belgian franc and the Danish and Norwegian crowns. The price of gold, which moves inversely to the dollar, reached a new peak of $233.70 an ounce. "We had not expected much," explained one Zurich foreign-exchange dealer about Carter's plan, "but neither had we expected so little." On hearing the news, Carter remarked rather tartly to his economic advisers: "I did everything you said would make the market go up--and it went down. What happened?"

At home, the Carter plan had some early supporters. Said Heath Larry, president of the National Association of Manufacturers: "The time has come for us to join the President in attacking the problem--and stop attacking each other." Claimed a spokesman for Otto Eckstein's Data Resources, Inc., a highly respected economic think tank in Lexington, Mass.: "The President has taken as tough an approach to wage-price standards as is possible short of statutory controls. The program has a reasonable prospect of success." General Electric Chairman Reginald Jones agreed, explaining: "It was reassuring to hear the President place his main emphasis on measures aimed at the basic causes of inflation: excessive Government spending and regulations that add needlessly to the cost of doing business." While voicing some reservations, Carter Murphy, head of Southern Methodist University's economics department, viewed Carter's promise to veto more tax cuts as "a courageous political decision."

Despite these plaudits, there were some serious objections. Most critics had three main complaints about Carter's program: 1) it does not include an all-out and specific attack by Carter on Government spending; 2) it does nothing to influence the supply of money, which usually grows along with federal spending and is thus a major cause of inflation; 3) it does not provide for any real enforcement of the wage-price guidelines.

Contended Stanford Economist Michael Boskin: "To deal with inflation, we must get Government spending under control. The longer we wait, the worse the biting of the bullet will be." University of Chicago Economist Walter Fackler insisted that neither voluntary nor mandatory restraints on wages and prices will work. "It's all just a silly game, a ritual we go through periodically. We will have inflation as long as the Federal Reserve continues to pump more money into the system." Yet the President could hardly present a plan for directing the Federal Reserve Board's policies since it is, by law, an independent agency designed to be free of political influence.

The tax rebate proposal for workers whose wage hikes fall behind the inflation rate was termed "innovative" by some economists. But others wonder whether it might not simply add to inflation if the rate soars beyond 7% and millions of workers then get a tax rebate. An 8% inflation rate could cost the government about $10 billion in rebates.

The first big test of Carter's program will come in the negotiation of several major union contracts early in the new year. Union reaction was generally less critical than the Administration had feared. "I don't think anyone should reject this out of hand," said United Auto Workers President Douglas Fraser, though he suspected that the price guidelines would prove more flexible than the wage limits and contended that profits, too, should be limited. Teamsters President Frank Fitzsimmons, whose union will be among the first to negotiate new contracts this winter, was cautiously cooperative. His members, he said, "will do their share" to help fight inflation "if this program establishes some credibility on the price side."

Perhaps symptomatic of the inflation quandary, many economists and business men were critical of what Carter had proposed--and just as critical of most alternatives. "I prefer voluntary guidelines to established wage and price controls," said Maurice Segall, president of the Zayre discount department store chain. "But I'm also skeptical of the ability to carry it off on a voluntary basis." An underlying concern of many critics was that the Carter plan, despite his disavowals, was but a stopgap before he imposed mandatory controls.

The partisan political reaction was predictable. Campaigning in Tulsa, former President Ford said of Carter: "We gave him the policies and the programs to bring inflation under 4%--and now we're back to double-digit inflation. They've blown it." Ford ignored the fact that inflation reached a low of about 4.8% in his last year in office largely because of a business recession. Republican National Chairman Bill Brock charged that "the responsibility for this nation's runaway inflation rests squarely with President Carter and the Democratic Congress. His latest inflation program is a double-barreled blast at the American people." Granted TV time to respond to Carter's speech, Republicans including Ford, Brock, Ronald Reagan, George Bush and Missouri Senator John Danforth attacked the growth of Government, urged sharper decreases in federal spending and called for even larger tax cuts.

Despite the criticism and a prevalent prediction that the Carter plan will fail --a forecast that runs the risk of becoming self-fulfilling--the Administration's selling job has only just begun. While nothing so clear-cut as a yes or no vote in Congress is involved, the White House is launching the same kind of public relations fight that it waged on the Panama Canal treaties and the sale of advanced aircraft to Saudi Arabia. Even before the plan was announced, 28 groups, from the Business Roundtable to consumer advocates and black leaders, had been invited to the White House for a sales pitch. Since then, Administration experts have manned a ten-line telephone bank to plug the plan in calls to business and labor leaders. Administration spokesmen have landed many invitations for TV interviews. At least 800 people have been briefed at the White House and more are scheduled, including the chiefs of many middle-size companies.

Yet the uphill fight to rally the nation behind his plan falls mainly to the President. As he renewed his campaigning for Democrats on two political trips last week, he worked in appeals for help in the inflation fight. He drew an impressive 40,000 people on a rainy day in Nashville, and he ended his speech by asking: "Will you help me with our anti-inflation program? Will you help me?" The response from the crowd was only mildly enthusiastic. The President drew louder cheers in sunny Miami when he asked a rally of some 1,000 mostly elderly citizens: "When I get back to Washington and get that less-than-perfect tax bill, do you think I ought to sign it?" As his listeners roared "Yes!" Carter grinned and replied: "I will take your advice. I have decided to sign the bill." Then turning again to inflation, he spoke out for his plan as "badly needed." Said he: "It is tough. It is necessary. It is fair." The success of his fight against inflation will obviously hinge on whether enough Americans share in that judgment.

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