Rising Perils of Stage II

Wage-price policies baffle and bewilder labor and industry

"God-awful."

That was the pained reaction of Alfred Kahn, the Administration's chief price fighter, to the latest inflationary onslaughts. A month after President Carter mounted Stage II in his anti-inflation campaign, prices continue to rise and skepticism about the program's punch continues to spread. Trying to dispel some of the uncertainty, an unsmiling President declared on national television last week: "I think we will be successful in leveling off the rate of inflation and then bringing it down." But, he added, "I'm beginning to see more and more clearly how difficult it will be."

All he had to do was look at the latest doleful statistics. The consumer price index in October rose at a compound annual rate of 10% for the second month in a row. Food and beverages jumped at a rate of 10%, housing 12.7% and gasoline 18.2%. For the first time the overall index went above the 200 mark, meaning that today's battered dollar buys only half what it did in 1967, when the big price leaps began to pay for the Viet Nam War. In terms of real, aftertax buying power, many Americans are earning less now than they did then.

The Administration's voluntary wage-price guidelines are getting off to a shakier start than friend or foe had anticipated. Kahn, the anti-inflation czar, does not have enough staffers or even telephones to accommodate the torrent of questions from business and labor leaders seeking clarification of the complex program, with its ambivalent language and infamous algebraic equations for figuring out how much prices may be raised.

Generally, the Administration has won the reluctant cooperation of business. Last week General Motors and AT&T announced that they would comply with the guidelines. Increases in steel prices and railroad rates have been held within the basic standard, which calls for companies to limit price rises over the next year to half a percentage point below their average annual rises in 1976-77. Still higher increases may be made by companies with special problems, like rapidly rising raw material costs, so long as their pretax profit margins do not go above the average for the best two of the past three years. The trouble is that more and more corporations intend to take this profit-margin approach, which is extremely difficult to monitor.

On the labor side, most union leaders angrily reject the 7% limit on wage-and-benefit raises. They note that the increased costs of maintaining jealously guarded benefits, such as health insurance and pensions, would eat up most, and in some cases all, of the allowable raise without adding a dime to paychecks. Amid cries for more flexibility, the Administration stumbled about for several weeks before it indicated last week that workers would not be charged for higher costs of maintaining present benefit levels.

Even with these fixes, union chiefs reject the guidelines, which they contend limit wages much more rigidly than prices. Last week the 22,000-member Western Pulp and Paper Workers sued in federal court in Portland, Ore., to have the standards declared illegal. The charge: the program is mandatory, and the President has no congressional authority to impose it. United Auto Workers President Douglas Fraser insists that the only way to win labor's support would be for Congress to enact the President's proposal granting tax rebates to obedient union members and other groups if the inflation rate next year exceeds 7%. But Fraser doubts that Congress will pass such legislation in view of the chilly reception it has received from Ways and Means Chairman Al Ullman. Many Government officials at work devising the "wage insurance program" are also discouraged by its grave problems, notably how to put a limit on payments. Says one key official: "If we're lucky, Congress will kill this thing and take it off our hands."

The President is also in trouble with his promise to crack down on wasteful and costly federal regulation of business. The council that Carter appointed to do the job is stacked with regulators and headed by Douglas Costle, head of the Environmental Protection Agency. Says a high Administration official: "As long as the regulators are regulating themselves, what can you expect? What would happen on the price side if you got the 50 biggest firms together and told them to run the price program?"

While the incomes policy is shaky, the Administration's fiscal and monetary initiatives, which will be decisive factors in reducing inflation, are moving ahead relatively smoothly. In next year's budget, the White House is shooting for expenditures of about $530 billion vs. $492 billion this year, an increase of 7.7%, which is below the current inflation rate. To achieve that and hold the deficit to less than $30 billion will require substantial cutting in the growth of the budget; the President seems determined to do this. There are signs that he may even fudge on his promise to NATO to increase U.S. defense spending by 3% in real terms next year.

The Federal Reserve Board's monetary policy is turning tighter in an effort to restrain credit and the money supply. To signal its intentions, the board controls the interest rate for Fed funds, which are reserves that banks lend each other. That rate has risen to a high 10%. In addition, the nation's basic money supply, or M.I, dropped $1.9 billion to $359.5 billion during the week ending Nov. 22.

One consequence is that economic growth is slowing. Though GM Chairman Thomas Aquinas Murphy, who has a remarkably accurate forecasting ability, predicts that new car sales in the U.S. will climb from this year's near-record 11.3 million to 11.5 million next year, the more orthodox wisdom is that sales of both autos and new houses will decline in 1979. Carter conceded last week that the economy's growth rate will fall slightly below the rather modest 3% that his White House aides had been predicting. His real test will come when the tighter budget and monetary policies begin to bite, the subsidies are reduced, and loans and jobs become harder to get. Then the President will have to decide between standing firm or caving in to the protests of special interest groups. Considering that such a broad majority of Americans are being hurt by inflation, standing firm would seem the best means to help his reelection chances. As Carter said last week: "Instead of being an unpopular act, I think it would be popular.''

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