Inflation: The Big Fight Opens

Stage 2 had better succeed if a recession is to be avoided

STOCK MARKET SUFFERS RECORD ONE-WEEK LOSS. DOLLAR SCRAPES NEW LOWS. INTEREST RATES SOAR, PINCHING BORROWERS. Different combinations, but the same old dismal headlines; congressional passage of the long-awaited tax and energy bills changed them not at all last week. So what else is new? This week one highly significant element: President Carter goes on TV to start his most serious attempt yet to douse the raging U.S. inflation that is the basic cause of all the other economic damage.

In a speech from the White House Tuesday night, the President is scheduled to unfurl Stage 2 of his anti-inflation program (Stage 1 began with the limp voluntarism he announced last April). The program that his advisers described in private briefings to top businessmen last week is quite detailed--so much so that the Government is preparing a thick book of definitions and a 300-question-and-answer fact sheet to explain the wage-price guidelines that are the heart of the program. Stage 2's main features:

WAGE GUIDELINES. Most workers will be asked to settle for wage-and-benefit increases averaging 7% over the next three years, with no more than 8% coming in the first year. One exception: workers earning less than $3 or $3.50 an hour (the final figure was uncertain) will be free to get all they can.

PRICE STANDARDS. Companies will be expected to hold price boosts to a half point below the average of the past two years. If everyone obeys, the Administration hopes the increase in all industrial prices can be held to between 6% and 6.5%. Again there will be exceptions for companies that are suffering rapid cost increases and have low profits.

MONITORING. Companies will not be required to report wage and price increases to the Government. But the top 400 or so--those whose annual sales total roughly $500 million or more--are being warned that they will be watched closely by 20 to 100 bureaucrats being added to the staff of the Council on Wage and Price Stability (COWPS). The 400 biggest companies in turn will be expected to watch wage-price boosts by their suppliers

PENALTIES AGAINST VIOLATORS. They will first be warned privately, then denounced publicly. If they do not reform, the Government will try to exclude them from bidding on federal contracts, possibly threaten them with unfavorable regulatory and antitrust action, and loosen restrictions that now protect them against import competition--in brief, says one executive, use every extralegal lever available "short of sending in the FBI for the files at night."

HIRING FREEZE. There will be a ceiling on new federal hiring, and reduction of the Government work force by attrition. According to one plan, only half of all Government employees who retire or quit will be replaced.

BUDGET TRIMMING. The federal deficit will be further reduced. Red ink in fiscal 1979, which has just started, is estimated at $40 billion, down from $60.6 billion projected last January. For fiscal 1980, advisers are determined to bring the deficit down to no more than $30 billion. Treasury Secretary W. Michael Blumenthal advocates a figure in "the 20s," and Budget Boss James Mclntyre would like it held to $25 billion.

REGULATORY REFORM. Carter will probably propose a "regulatory calendar" that would require all federal agencies to list the regulations that they intend to impose on business during the year, the effective dates and a cost-benefit analysis of each. The idea is to avoid a pile-up of regulations that would subject business to inflationary cost increases.

To head the Stage 2 program, Carter would like to name Alfred Kahn, a somewhat ironic choice. As chairman of the Civil Aeronautics Board, Kahn became famous for freeing airlines from burdensome federal regulation. As overseer of the guidelines, he would be in charge of much greater Government intervention in the private economy. But Kahn has built a towering reputation in Washington as a bureaucrat who gets things done. A vastly energetic but informal official who often pads about his office in stocking feet, Kahn is a trained economist who believes that the greatest challenge to his profession "is deciding not what the ultimate, economically rational equilibrium should look like, but what is economically rational in an irrational world and how best to get from here to there." At week's end he had not decided whether to take the job. If he does, he has a quick enough wit to appreciate a gag that is circulating in Washington: he should be called not anti-inflation czar but king--King Kahn.

Though the program sounds tough, parts of it are misleading. The federal hiring freeze probably will be presented as an act of spartan self-denial by the Administration. Actually, Carter has no choice: a little-noticed amendment to the Civil Service Reform Act requires him to reduce the number of Government employees, now 2.3 million, to 2.2 million by next October. More important, Administration officials have been making much of the fact that the Government awards some $80 billion in federal contracts each year, in theory giving it powerful leverage in forcing companies to comply with the guidelines. In fact, on most of those contracts the Government must stick with the same highly specialized suppliers.

So the guidelines come down to another exercise in jawboning--trying to persuade unions and companies to comply voluntarily. First portents are not favorable. AFL-CIO President George Meany has damned the whole idea of guidelines. He fears that companies will zealously enforce the wage limits while raising prices as fast as ever.

Businessmen tend to view the guidelines as an attack on the symptoms rather than the causes of inflation. Shearon Harris, chairman of the U.S. Chamber of Commerce, sent Carter a six-page letter sarcastically suggesting that the Administration apply guidelines not to wages and prices but to its own actions, "such as a 7% limit on the increase in federal taxes, a 5 3/4% [ceiling on the] increase in overall federal spending and a freeze on net new regulations." William Proxmire, chairman of the Senate banking committee, said last week that guidelines may have "some value" but "there is one answer and one answer only at this time--cut spending." He urges cuts of 5% to 10% in the budgets of all federal departments and agencies.

Nonetheless, Administration officials vow to keep the guidelines in effect as long as necessary to bring inflation down to an acceptable rate. Since the program aims at reducing the rate by only half a percentage point a year, that could take a very long time. Price increases actually slowed down to a 7% annual rate in the third quarter, a welcome relief from the 11 % pace of the previous three months, but the rate is expected to average around 8% for 1978 as a whole and to be running at about that pace by year's end.

The alternatives to Stage 2, Administration planners believe, are worse. In a burst of candor, COWPS Director Barry Bosworth said that if the plan fails, the U.S. will face a "cruel choice" of outright wage-price controls or recession. Some non-Government economists, including Democrats Arthur Okun and Walter Heller, also believe a recession is becoming more likely, partly because inflation is eating up consumer purchasing power, partly because the Federal Reserve Board is pushing interest rates so high.

Certainly the tax and energy bills, necessary though they are, will not right the economy. They once were the keystones of the President's economic strategy, but by the time they finally survived their ordeal by Congress, they had come to seem mere Band-Aids.

The $12.7 billion reduction in individual income levies provided by the tax bill will just about offset the bite of increased Social Security taxes and the impact of inflation pushing people into higher tax brackets. But the cuts in corporate and capital gains taxes stand to improve the business climate and stimulate investment. The energy bill permits natural gas prices to rise significantly, leading to total decontrol in 1985, and meanwhile imposes the same pricing system on gas pumped and sold within a single state and fuel piped across state lines. Energy executives in Houston forecast that as a result, more gas will flow from producing states like Texas and Louisiana to homes and factories in the North and Midwest, where gas ran desperately short the past two winters.

The big question is whether the bill's conservation measures, which are much weaker than the President wanted, will enable the U.S. to cut oil imports. Two weeks ago, Energy Secretary James Schlesinger estimated that U.S. oil imports will rise 2 million bbl. per day by 1985, to around 10 million bbl., rather than drop 2.5 million bbl., as Carter had pledged. That prospect helped touch off another orgy of dollar selling abroad.

Nervousness about the weak dollar and inflation conspired to bring a startling break in stock prices. The Dow Jones industrial average last week tumbled more than 59 points, to 838, its worst one-week loss in history. Indeed, currency and stock markets seem to be getting locked into a vicious circle. When a plunge in the dollar causes stock prices to drop, foreign moneymen read the stock slide as an indication that Americans are losing faith in their own economy, and they unload still more dollars.

Investors' overriding worry, however, is not the dollar but interest rates. Last week the Federal Reserve Board acted to push the "Fed funds" rate at which banks lend to one another to nearly 9%, a level that Economist Okun believes-almost guarantees recession by making borrowing more expensive. Nor is there much hope that the rises in loan charges will stop. The Federal Reserve has been jacking up interest rates largely in order to contain an inflationary increase in the U.S. money supply, but so far it has failed. Money supply during the past month has shot up at an annual rate of about 12%, nearly double the board's upper target of 6.5%.

The Fed has ways of manipulating money supply other than raising interest rates; it can, for example, pull money out of the banking system by selling Government securities. But heavy loan demands defeat the best-laid plans and cause both interest rates and the money supply to rise. So it is a destructive cycle: people borrow to stay ahead of inflation, and vigorous borrowing feeds inflation. So all economic troubles now come back to inflation--a great evil in itself and the main force that is driving down the dollar and the stock market, forcing up interest rates, frightening consumers and threatening recession. In selling his latest program to combat it, Carter has one potentially powerful asset: the prestige he won by his diplomatic triumph at Camp David. Richard Curtin, director of the University of Michigan survey of consumer attitudes, reports: "People who were not giving him a hearing just a while ago are now willing to listen. This is very important because confidence in Government policy has a very strong impact on the consumer and his decisions."

If Carter can build a public groundswell for Stage 2, labor and business, for all their misgivings, may feel forced to observe the guidelines, and if the wage-price spiral can be slowed, the Government will get more time to chop away at the budget deficit. But even if a socko TV speech gets the program off to a good start, the President will face the tough task of maintaining public, labor and business confidence --and imposing unpleasantly stringent spending discipline on his own Administration--for what at best will be a long, long haul.

This file is automatically generated by a robot program, so viewer discretion is required.