Nixon's Grand Design for Recovery

FOR the second time in two months, President Richard Nixon reversed his own and his party's policies with a swiftness and style that is virtually unmatched in modern American politics. What he did in foreign policy with his approach to Peking he outdid in domestic affairs last week. Casting aside "the game plan" he has so long and implacably pursued, the President announced "the most comprehensive New Economic Policy to be undertaken by this nation in four decades." The claim was merited. A show of firm leadership was clearly needed in order to get the U.S. industrial machine running smoothly once more.

He indeed laid out the most sweeping changes since the Hundred Days of the New Deal in 1933, when Franklin Roosevelt took the U.S. off the gold standard and began to get the Depression-racked economy into gear. The Nixon program had immediate and dramatic impact at home: on the first day the Dow-Jones average took a record jump on the New York Stock Exchange. But abroad there was consternation. Nixon's measures threatened a serious reversal of the postwar trend toward freer trade. They also ripped the fraying international monetary agreements that have made expanded trade possible. Canada and Japan, America's two largest trading partners, sent anxious emissaries to plead for explanations.

Declining Confidence

The Tokyo exchange led other overseas markets into a disastrous slide. Foreign exchange markets shut down, helpless in the currency confusion. Europe's finance ministers interrupted their vacations and rushed to Brussels to try to patch up the international monetary order. Only three months ago, U.S. Treasury Secretary John Connally had stoutly told a Munich bankers' convention that the dollar would not be devalued. Now it almost certainly will be.

Many factors coalesced to force the swift move. Pollster-Analyst Albert Sindlinger found early in August that the consumer confidence index had fallen to 55%--lower, he said, than during the 1957 recession. Only 27% of those he interviewed wanted to see Nixon reelected. Secretary of Commerce Maurice Stans warned that this year the U.S. may be running a trade deficit for the first time since 1893. House Ways and Means Chairman Wilbur Mills was getting ready to hold hearings on his own proposals for the economy. The final blow was a devastating new attack on the long-weakened dollar in the world's money markets.

Nixon imposed direct controls on prices and wages for the first time since the Korean War. Confronted with a situation of inflation-cum-unemployment in which the old textbook remedies were no longer working, he seemed to be committing the Federal Government to an intimate role in major pay and pricing decisions by U.S. business for some time to come. The changes were all the more remarkable for having been agreed to in the course of one short weekend at Camp David.

Politically, it was a particularly satisfying coup for the Republicans, as the President's measures were in several cases neatly lifted from the proposals of his Democratic critics. Not only did he take the Democrats' advice, but he also used as his authority for a key order legislation that the Dem ocrats had forced upon him (see box, page 8). And the stakes were high. His trip to China is almost certain to bring him political rewards, but come Elec tion Day 1972, mending the nation's pocketbook could pay off at the polls as Peking never would.

The President's Package for a key order legislation that the Democrats had forced upon him (see box, page 8). And the stakes were high. His trip to China is almost certain to bring him political rewards, but come Election Day 1972, mending the nation's pocketbook could pay off at the polls as Peking never would.

The President's Package

The program the President has ordered, or asked Congress for, separates into eight parts:

> The U.S. will no longer convert foreign-held dollars into gold; temporarily, at least, the dollar will no longer be the foundation of international monetary dealings, as it has been since 1944.

>With minor exceptions, all prices, wages, rents and dividends are frozen at present levels for 90 days.

> A Cabinet-level Cost of Living Council, headed by Treasury Secretary John Connally, will preside over the freeze.

> Government spending will be reduced by $4.7 billion. Federal payrolls will be cut 5% ; foreign aid will be pared by 10%; and the effective dates of Nixon Administration programs for revenue sharing and welfare reform will be pushed back.

> The 7% excise tax on automobiles will be repealed retroactive to Aug. 15; that means an average saving of $200 per car, which should be passed along to the buyer.

> Industry will get a 10% tax credit on new investment for one year; the credit will thereafter become 5%.

> A $50 increase in the federal personal income tax exemption will take effect at the beginning of 1972 instead of a year later; this should release an extra $2 billion to consumers next year.

> Most imports will be subjected to a 10% surcharge, which in most cases will make U.S. goods more competitive in the domestic market with those from overseas.

Nixon's proposals were designed 1) to stimulate the domestic economy by encouraging industrial investment and consumer spending and making imported goods more expensive, and 2) to blunt the mounting attack on the wavering dollar. Said the President: "Every action I have taken tonight is designed to nurture and stimulate [the] competitive spirit, to help us snap out of the self-doubt, the self-disparagement that saps our energy and erodes our confidence in ourselves." Once more, Nixon was handling a crisis, and he seemed to be enjoying it all hugely. Observes TIME Washington Bureau Chief Hugh Sidey: "Nixon clings to what is familiar until the last moment. Then, when the evidence overwhelms him or something happens in his gut, he decides to act, and nothing stands very long in his way. He abandons his philosophy, his promises, his speeches, his friends, his counselors. He marches out of one life into a new world without any apologies or glancing back."

Basic Ingredients

What prompted the turnabout? Earlier in the year, Nixon ruled out a tax cut as a means of restarting the economy. Over objections from his Council of Economic Advisers, headed by Paul McCracken, Nixon took the advice of George Shultz, chief of the Office of Management and Budget. Shultz thought that large doses of money from the Federal Reserve, presided over by Nixon's old economic mentor Arthur Burns, would be enough to get things moving. Besides, a tax cut would require a trek up to Capitol Hill, a humiliating concession that all was not well.

The Fed put more money into the economy, but Burns himself knew that it could do so only temporarily without having an inflationary effect. He went to see shrewd, conservative Wilbur Mills, whose word on economic matters is virtually law in the House. Mills agreed to promote an investment-credit bill, should one be needed. Burns also opened communications with John Connally, the Texas Democrat whom Nixon had just made Secretary of the Treasury.

But Shultz still had Nixon's ear. With Nixon's express approval, he proclaimed in April that no changes were contemplated in the Administration's approach. "Steady as she goes" was the watchword, said Shultz.

At first, Connally went along with the Shultz conclusions; then he started boning up on reports dealing with the nation's economic miseries. Urged on by two deputies--Paul Volcker, an expert in international monetary affairs, and Murray Weidenbaum, a specialist in the domestic economy--Connally soon found himself studying a package of proposals that contained the basic ingredients of the New Economic Policy. Early in July, Connally asked his staff for weekly memos on anything that was on their minds. "I wanted their opinions on where we are," he recalls, "on the President, the Congress, the economy, what should be done, anything." The recommendations he got included wage and price guidelines, freezes, tax cuts. A month ago, Weidenbaum began working out the details of a wage-price freeze; at the same time Volcker stepped up his study of the specifics of cutting the dollar loose from gold. More planning followed, though few of those doing the staff work were told that what they were handling was anything more than a contingency plan. Indeed, a contingency plan was all it was until the last minute, when the President was persuaded that he should act.

On short notice, Nixon summoned his key economic advisers to a climactic weekend gathering at Camp David, his

Catoctin Mountain retreat. Burns and McCracken were there; so were Shultz and his deputy, Caspar Weinburger, and the two Teutons who guard Nixon's gates, H.R. Haldeman and John Ehrlichman. Peter Peterson, a presidential aide for international economic affairs, joined the sessions. Volcker and Speechwriter Bill Safire sneaked across Washington to the Anacostia Naval Air Station, where they boarded a helicopter for Camp David. John Connally, who had no way of knowing that the pressure on the dollar would propel him into prominence so soon, had just gone to his Texas ranch for a vacation. He jetted hastily back, and when the first meeting began Friday afternoon, he sat at Nixon's right.

Remembered Weekend

"It was tough," Connally says. "A damn tough re-evaluation and re-analysis." But, says another participant, "We all knew there had to be change." Nixon made it plain from; the beginning that the time had come to try a new strategy. When it was all over, when the draft of his Sunday television speech was finished, he gave each man a Camp David jacket, a blue windbreaker that bears the presidential seal. It was, said Nixon, "a weekend that would long be remembered."

Next day, speaking to a group of second-echelon Administration officials, Nixon was quick to pay tribute to Connally's forcefulness and expertise. "This kind of program doesn't come off the top of a President's head," he said. "It was developed by a great team quarterbacked by Secretary Connally. I was more like the coach. I learned as much from the quarterback as he learned from me." Two days after the President's television broadcast, vacationing congressional leaders, hastily rounded up and flown to Washington in five planes that had been dispatched by Nixon, filed into the White House for a briefing. Nixon nodded in Mills' direction. "We can all take credit for this program," Nixon said. "Wilbur, these are some of your ideas." Mills smiled wanly. The moment of glory was Nixon's, but Mills will have plenty to say about those parts of the program that require congressional assent.

Evangelical Fervor

At the briefing, Burns said of Nixon's proposals: "This has electrified the nation." It had obviously electrified Nixon too. Before settling into San Clemente for a rest, he spent the rest of the week barnstorming the U.S. with the fervor of a newly sawdusted evangelist. He had the Knights of Columbus standing on their chairs to applaud him in New York. In Springfield, Ill., Nixon invoked "Lincoln's legacy." America, said the President, needs sacrifice and competition: "We can at this point in our history nobly save, or meanly lose, man's last best hope." Nixon capped his week with a gesture of reconciliation toward the nation most aggrieved by his recent acts. He revealed that he will meet Emperor Hirohito in Anchorage, Alaska, on Sept. 26--the first U.S. visit of a Japanese emperor.

While the President was trumpeting his rhetorical ruffles and flourishes, his dramatic new plan left many Americans confused about just how it will affect them. The confusion began with the Government itself. At first the word was that state and local government employees who had pay raises in the works would be allowed to get them during the freeze; that decision was reversed. Most embarrassing to the Administration, the Pentagon announced that an Oct. 1 pay boost of $2.4 billion for the armed forces would go through despite the freeze; John Connally ruled that out too--vehemently.

The task of trying to interpret the wage-price freeze fell to the little-known Office of Emergency Preparedness (see box, page 8). The OEP aims to answer all the questions raised by the freeze. But no structure is contemplated that would be remotely similar to that of the Office of Price Administration, which at its peak during World War II included 63,000 paid and over 200,000 volunteer employees. In 1942, one of those OPA employees was a young lawyer named Richard Nixon. He stayed just long enough to build an abiding dislike for the ponderous bureaucratic mechanism. So it was with some feeling that Nixon said in his television address: "While the wage-price freeze will be backed by Government sanctions, if necessary, it will not be accompanied by the establishment of a huge price-control bureaucracy. I am relying on the voluntary cooperation of all Americans."

He is not likely to get it from all Americans. The first strident objections came from labor leaders. The Government's rule is that no wage increase scheduled to take effect during the freeze period may be paid, even if it has already been agreed to in a contract. United Auto Workers President Leonard Woodcock noted that two of his contracts--with Caterpillar and John Deere--call for raises during the three-month freeze. He threatened to sue, and added: "If this Administration thinks that just by issuing an edict they can tear up contracts, they are saying they want war. If they want war, they can have war."

Another loud demurrer came from A.F.L.-C.I.O. President George Meany. Shultz and Labor Secretary James Hodgson explained the Nixon program to the 35-member A.F.L.-C.I.O. executive council, but they might as well have saved their breath. Meany called the wage freeze "patently discriminatory" against labor. Hodgson insisted that the rank-and-file union man would back the Nixon plan and accused Meany of being "out of step" with the average working man. That struck a raw nerve, for the aged Meany, 77, feels his leadership threatened by younger union Turks. He sneered: "I don't pay too much attention to the Secretary. If you have a problem with the landlord, you don't discuss it with the janitor."

Open Defiance

The Nixon Administration pleaded with labor leaders to make a voluntary end to existing strikes in order to help the economy pick up at the maximum possible speed. The most devastating strike under way is the West Coast dock stoppage, now eight weeks old, led by Harry Bridges. It is likely to continue. Bridges wired Nixon that the freeze "favors the rich," and he added: "We are with you in your desire to stop inflation in our country, but it is wrong to pick on the workers, who suffer first and the most from inflation."

Other complaints came in from Ralph Nader, who told a congressional committee that he suspected General Motors had been given advance notice of the price freeze, possibly during a recent meeting between Connally and G.M. President James Roche. (G.M. had raised prices on its 1972 models before the freeze went into effect, but agreed to rescind the increases.)

In some political quarters there was open defiance: Democrat Preston Smith, John Connally's successor as Governor of Texas, announced that he had ordered state officials to proceed with scheduled 6.8% pay raises for teachers and other state government workers. There are problems with teacher contracts elsewhere. Most of them take effect at the start of the school year. Nixon took Smith's defiance calmly. "I think Governor Connally can take care of him," Nixon said. The Justice Department intends to ask for an injunction against Smith this week.

Connally may have a somewhat more difficult time taking care of congressional objectors to the President's New Economic Policy. Nixon held the Hill leaders' feet to the fire at their briefing early last week. "The basis of this program is legislation," he said. "If you don't hurry, it will hurt. We've got to do these things and we've got to do them now. Now."

Democrats hastened to spell out their objections. Wages are frozen, but not interest rates; strikes are discouraged, but profits are free to rise; the Administration's chief social welfare innovation, the family assistance program, carrying a guaranteed minimum income, has been deferred for a year as part of the price of economic stability. Said a Muskie aide: "You create enough money for millionaires to buy Cadillacs, and you create jobs for chauffeurs." Senator Muskie was more guarded, but he made approximately the same point. Said Muskie: "I don't believe that the best way or the fairest way to stimulate the economy is a series of large tax breaks for industry which far exceed their ability to expand, and which will depend on benefits trickling down to the consumer." Oklahoma's Senator Fred Harris described Nixon's program as "an economic fan dance which attempts to hide the pro-business bias of his proposals."

TIME Washington Correspondent Simmons Fentress summed up: "The Democrats have been embarrassed by this President who opened their closet and stole their shoes. They are by no means boxed in, however, and they are opening up alternate lines of attack." Post-Freeze Problems TIME Washington Correspondent Simmons Fentress summed up: "The Democrats have been embarrassed by this President who opened their closet and stole their shoes. They are by no means boxed in, however, and they are opening up alternate lines of attack."

Post-Freeze Problems

Neither the narrower political consequences nor the broader effectiveness of the New Economic Policy will be known for some time. Nixon's store of national good will is not overwhelming, but it should be enough to persuade most Americans to go along for the initial 90-day period, given the near universal dissatisfaction with the way the economy stood. More important, though, is what happens after the freeze expires--and that is a problem that the Administration is already worrying about.

The immediate post-freeze period is already known around the White House as "Phase 2." It is of vital importance. For if controls are suddenly lifted, without any transitional mechanism or any ongoing wage-price review board to hold increases firmly within acceptable limits, there would be no point to the freeze in the first place. All the gains would evaporate at once; prices would rise sharply to make up for the hold-down, and wages would jump to keep pace. The federal official charged with special responsibility for Phase 2 is Herbert Stein of the Council of Economic Advisers, an outspoken economist who was a vigorous opponent of wage-price regulation only a few months ago.

Elusive Mood

When the freeze expires in mid-November, how will anyone know whether or not it has been a success? Phase 2 will be the real test, but at the end of the first 90 days there will be several useful points at which to apply the economic litmus. Part of the test will be psychological: there will have to be a popular consensus that the program is working, some feeling that things look better. Even before then, there will have to have been serious negotiations between labor, management and Government to get Phase 2 under way. If Phase 1 has been a success, wages, of course, will be steady; so should the cost of living, particularly since automobile prices will remain level or even decrease. If there is a resurgence in consumer confidence, the high rate of savings should have come down and retail sales should have picked up well before the freeze expires. If labor costs are stable, as they should be, even a modest increase in productivity will mean higher profits for manufacturers. That, in turn, means a net gain in real income across the U.S. For whom? If prices are frozen beyond the end of Phase 1 and wages are allowed to rise moderately--say, by 4%--that would distribute the net gain fairly widely. At best, there will be a good start toward building a new international monetary structure, and the U.S. will avoid touching off a protectionist trade war.

Administration experts have already started speculating about the shape of Phase 2. There will be neither a return to the pre-freeze status quo nor permanent imposition of a thoroughgoing control system. Instead, the President is likely to pick one or more intermediate devices within the first 60 days of the freeze period, thus leaving the final 30 days for setting up whatever administrative machinery is required. He will probably make use of wage-price review boards for various industries, selective controls for others, economic sanctions through withholding or awarding Government buying contracts, and just plain jawboning. Quite possibly the freeze could be extended for a time beyond the end of the 90-day period, then lifted industry by industry as continuing arrangements are worked out.

If, in the end, the New Economic Policy is a failure, then John Connally's brightening star will surely fade, Shultz could re-emerge with new political clout, and Spiro Agnew--who was consulted in the New Economic Policy deliberations, as he never was about the overtures to Peking--would find himself no longer threatened by Connally for the vice-presidential nomination in 1972. In that case, however, even the Republican presidential nomination would be worth very little, for Nixon's best chance to get the U.S. economy under control would have failed.

In the dismal and difficult science of economics, one of the most important factors is the elusive matter of the public mood. Already there is an indi cation that Nixon's program is what Americans think they want. Pollster Sindlinger's consumer confidence index had climbed back to 64% by the middle of last week. Now 40% of Sindlinger's sample want Nixon reelected. The White House men are guardedly optimistic. Says one: "Economics isn't chemistry. You can take any theory you've got. If people think it's going to work, it will work. If they don't, it won't." If it does work, Nixon's program will pay off politically for him, and economically for most Americans.

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