Phase II: The Nagging Uncertainty

IN the initial burst of exuberance that greeted President Nixon's economic package last August, the stock market roared ahead. Since then, doubt and confusion have set in. The basic question: Will Phase II really work? Though there is still considerable public support for the program, there are disturbing signs that consumers and businessmen are at least temporarily holding back their spending and investing.

Wall Street Worry. Last week in the stock market, the Dow Jones industrial average fell 23 points, to 852, wiping out most of the gain that followed Nixon's announcement of the freeze. The market was reacting not only to worries about U.S. business for the rest of this year but also to the possibility of an international trade war (see story, page 35). Most important, investors were shaken by the report that mutual fund redemptions exceeded sales by $166 million in September--a record high for any month and the fourth month out of the last five that cash-ins were greater than new sales. This is a sensitive indicator because it suggests that small investors lack confidence that the market will rise. The Nixon Administration is concerned about the stock market's recent weakness and hopes to bolster its strength, in part by holding down interest rates. But last week's cut in the prime rate, which bankers reduced from 6% to 5f% after prodding from the U.S. Treasury, did not stem the slump.

Department store sales have been slow since just before the onset of the price freeze, and volume has actually been declining in some retail fields. But sales of cars and houses are strong (see BUSINESS); some economists suspect that consumers are spending heavily in the auto showrooms instead of the department stores, figuring that car prices will rise after the freeze.

In the third quarter, the gross national product grew by only $16 billion, to an adjusted annual rate of $ 1,059 billion, an unimpressive increase of 3% in terms of non-inflated dollars. By contrast, the real growth of the economy was 6.5% in the first quarter and 4.8% in the second quarter. At the same time, the federal budget is running a huge deficit; estimates run to $28 billion for this fiscal year--an amount that will make it more difficult for the Government to curb inflation.

Freeze in Decisions. For all the bad signs, there were also brighter portents. In a significant measurement of the effectiveness of the freeze, the Commerce Department announced that the overall rate of inflation dropped from an annual rate of 4% in the second quarter to 31% in the third quarter. And in September the consumer price index climbed by only .2%, or about half the rate of the previous six months. Meanwhile, New York's First National City Bank estimated that U.S. corporate profits after taxes in the third quarter climbed by 8% compared with the same period last year.

Despite that news, and much evidence that 1972 will be a strong year, investors as well as businessmen are troubled. Alan Greenspan, an occasional economic consultant to the Nixon Administration and a member DPI of TIME's Board of Economists, sums up the mood: "The delay in setting firm guidelines for the post-freeze period is creating more and more uncertainty and having a numbing effect on business confidence. Capital spending programs have been pared or stretched out. The uncertainty over prices after Nov. 13 has slowed down new orders at many plants, and production plans have been lowered. What we're seeing is a big freeze on business decision making."

White House aides reply that the confusion and guessing is necessary in the present period when the Phase II guideposts are being formulated. They argue that the alternative to confusion would be hard, explicit controls--and that those are about the last things that investors and businessmen would want.

Catching 22

President Nixon's master plan for temporary and fairly flexible wage and price controls moved a long step forward last week when the White House named 22 appointees to the post-freeze regulatory boards. It was not easy to recruit that many properly qualified members. Two of the Administration's first choices--David L. Cole and Bernard Meltzer, both labor arbitrators--turned down the chairmanship of the Pay Board.

A number of academicians also demurred, unwilling to abandon their classrooms in mid-semester for an indefinite stint in Washington. When President Nixon met with his appointees for the first time, he remarked: "Yes, some other people were invited to serve, but the ones that are here are the ones that have the guts and the patriotism to take on this very tough and very important job." To Arnold Weber, out going executive director of the Cost of Living Council and one of the 15 members of the new Pay Board, the reluctance of academics to serve demonstrated "the leisure of the theory class."

As a result, when the Cost of Living Council's new executive director, Donald Rumsfeld, presented most of the commission members to the press, there were some unfamiliar faces in the lineup.

THE PAY BOARD. Federal District Judge George Boldt of Tacoma, Wash., will head this board, which has the vaguely defined task of determining just how much wages can rise. Boldt claims no background in labor relations. Last winter he heard the trial of the Seattle Seven, a group of radicals charged with conspiring to damage federal property; Boldt's judicial cool helped to prevent the trial from becoming a local version of the Chicago Seven fiasco. When asked why he was picked for the Pay Board, Boldt replied, "I haven't the foggiest." He said he did not even know the man who suggested him for the job. "I could give him a bad time," he quipped, "especially if he needs bail in the western district of Washington."

The judge will preside over a Pay Board that includes five corporation executives and five of the nation's best-known labor chiefs.

>The business roster: Robert Bassett, a Chicago publisher; Railroader Benjamin Biaggini, president of the Southern Pacific Co.; Virgil Day, a labor negotiator for General Electric; Leonard McCollum, board chairman of Continental Oil; and Rocco Siciliano, president of the T.I. Corp., a Los Angeles holding company for title insurance operations.

>The labor list includes George Meany of the A.F.L.-C.I.O., Leonard Woodcock of the United Automobile Workers, I.W. Abel of the Steelworkers, Floyd Smith of the Machinists and Aerospace Workers, and Frank Fitzsimmons of the Teamsters.

>The "public members," who will hold the balance of power between business and labor, include Boldt. The others are Weber, who was deputy director of the Office of Management and the Budget before he joined the Cost of Living Council earlier this year; Neil H. Jacoby, a top economist at U.C.L.A.; William Caples, president of Ohio's Kenyon College and a former labor negotiator for the Inland Steel Co.; and Kermit Gordon, president of the Brookings Institution in Washington and a former U.S. budget director. It was Gordon who, as a member of President Kennedy's Council of Economic Advisers in 1962, helped formulate the 3.2% wage-price guideline that Democratic administrations used successfully until the Viet Nam buildup sent inflation surging. "I guess I had better put my theory where my mouth is," Gordon said last week.

THE PRICE COMMISSION. At the head of this seven-member commission is another newcomer to the public eye. He is C. Jackson Grayson Jr., dean of the Southern Methodist University Business School. Grayson, who has made his school one of the nation's most innovative training grounds for budding entrepreneurs, is known among his Dallas colleagues as a devout free-enterpriser. At the same time, he is an enthusiastic supporter of the President's Phase I freeze. The other commissioners: Pennsylvania's former Governor, William Scranton; Lawyer William Coleman Jr., chairman of the 1965 White House Conference on Civil Rights; Economist Robert Lanzillotti, dean of the college of business at the University of Florida in Gainesville; James Wilson Newman, former chief executive of Dun & Bradstreet; Dr. Marina von Neumann Whitman, professor of economics at the University of Pittsburgh; and John Queenan, former managing partner of the accounting firm Haskins & Sells.

Labor Pains. When the Grayson and Boldt panels start meeting in earnest this week, they will find a notable lack of guidance from the Administration on a major Phase II policy question: Should there be a firm numerical guideline for wage and price increases? Treasury Secretary John Connally favors such standards, but Budget Chief George Shultz is advocating a more flexible case-by-case approach. If the question is still unresolved when the freeze ends Nov. 13, then Connally's Cost of Living Council will impose temporary guidelines. The figures most often discussed are 5% to 6% for wage increases, and something less than that for prices.

One of the most explosive problems facing the Pay Board will be what to do about previously negotiated pay increases that have been held up by the freeze. Depending on which statistics are used, anywhere from 5,500,000 to 8,000,000 workers have had raises blocked. Many of them are covered by long-term labor contracts that call for increases during the next few years in the general range of 6% to 7 1/2%--with some at more than 10%. Labor leaders, including the five on the Pay Board, insist that those raises be granted, and that people who lost out on increases during the freeze get them retroactively. Many economists figure that labor costs would rise by only a small fraction if all the contracted increases were allowed. The Administration is reluctant to make exceptions to any policy of curbing wage raises. But the President may well have little choice other than to permit some of the raises so that George Meany will have no excuse to lead many unions out on strike.

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