From Freeze to Controlled Thaw

AFTER a last-minute flood of economic directives ironically reminiscent of the New Deal, the nation finally enters Phase II of President Nixon's economic program this week. The new rules, which could govern American wages and prices at least until next Election Day, poured out of the President's Pay Board and Price Commission almost until the hour of Phase II's arrival at 12:01 a.m. on Sunday. Even so, having endured a sudden and all but total three-month freeze, the economy has moved into a new climate of controlled thaw.

Phase II's outlines did not lack for critics or doubters. Labor leaders were angered by a Pay Board ruling that will prevent 1,600,000 of their members from collecting retroactively most raises that would have come due during the freeze. On prices, businessmen expressed some displeasure over the big surprise in the rules: a guideline* on profits (see story on page 30), which were not subject to anything resembling control even during the freeze. But no one has yet proposed outright defiance. By insulating himself through commissions, boards and councils from the rough and tumble of the actual decisions, Richard Nixon clearly succeeded in making Phase II much more of a team project than the freeze had been.

Unions, to be sure, are reluctant members of the team. Their five representatives on the Pay Board were outvoted on the wage package by the ten business and public members. Still, the board's final decision was a much more equitable compromise than A.F.L.-C.I.O. President George Meany would admit. It set the overall wage guideline at 5.5% annually (see following story), halfway between the original proposals of labor and management. Further, the board decided to permit nearly all wage increases already written into contracts, including some that exceed the 5.5% guideline. The only dispute that the labor members lost outright was their demand that all freeze-delayed increases be paid retroactively.

In effect, the public and business members of the Pay Board decided to call labor's bluff that it would work against the program unless all union demands were met and see what would happen. At least for the moment, all that happened was angry noise from Meany & Co. The labor members did not walk off the Pay Board, as they had made many implied threats to do. Union leaders correctly feel that they are in a political trap: a walkout, or strikes against Pay Board decisions, might set them up as the villains if Phase II fails to bring inflation under control.

The job of the Price Commission, headed by former S.M.U. Business School Dean C. Jackson Gray son Jr., was complicated by the Pay Board's long struggle to formulate wage guidelines. The commission, composed of seven public members, could hardly lay down price rules until it knew what wage increases would be permitted in Phase II. At almost the last moment, the commission decided to let prices rise only enough to reflect actual increases in costs, minus any rises in workers' productivity--and then only if the price hikes do not fatten company profit margins. Some economists think that this tough-sounding rule will prove to be an administrative nightmare. Alan Greenspan, a member of TIME'S Board of Economists, fears that many firms that maintain only hazy running measures of their productivity and profit margins will have little idea when they decide on price boosts whether they are acting legally or illegally.

Three Tiers. The Government will monitor both wages and prices by dividing the economy, like Caesar's Gaul, into three parts. Firms with annual sales of at least $100 million, which include all of FORTUNE'S list of the 500 largest U.S. corporations plus 800 others, and employee groups of at least 5,000 members will be required to notify the appropriate Government board 30 days in advance of raising wages or prices and obtain approval. The second tier of economic units, firms whose sales are between $50 million and $100 million annually and employee groups numbering 1,000 to 5,000, must report increases but do not need to wait for permission to put them into effect. The remaining thousands of employers and millions of workers, while bound to the same criteria as everyone else, will be subject only to spot checks by the Internal Revenue Service.

The monitoring system clearly is aimed primarily at massive corporations and huge labor unions. That is partly due to the President's abhorrence of creating an OPA-style bureaucracy large enough to keep check on everyone. But it also reflects the belief of many economists that it was big business and big labor--which have somehow grown powerful enough to resist normal market forces even in a recession--that created the need for controls. By reining in tightly on a relatively few large units, these economists predict, the Government should be able to restrain the rest of the economy as well. There is some doubt, though, that the 3,000 IRS agents detailed to investigate violations of Phase II rules will be anywhere near enough to do the job effectively.

Another potential obstacle to the success of Phase II is the degree of flexibility shown by the Pay Board and the Price Commission. Both left themselves ample room to make exceptions from the guidelines for hardship cases--and to exception the program to death, should they choose or be pressured into doing so. The Pay Board, for example, agreed to consider vagaries like "the equitable position of the employees involved" in deciding about new contracts. And the Cost of Living Council modified price rules less than a day after they had been posted. Some of the nation's largest firms that face imminent increases in wages, including automakers, will be allowed to raise prices without waiting the required 30 days. Their prices will be subject to later rollback by the Price Commission. Nonetheless, as even the President acknowledged, some highly visible prices can be expected to ''bulge" in the first days of Phase II.

Toward Phase III. For all that, the debate and even rancor of the past three months have produced a program close to the one long urged on Nixon by many economists, including a majority of TIME'S Board of Economists. "It is a good, constructive and reasonable start," says Walter Heller, former head of the Council of Economic Advisers. The biggest question of Phase II is whether the panels of men named by the President to administer his plan can convince businessmen, workers and consumers that the controls are being handled strictly yet equitably. If they can do so, there is a good chance that the U.S. economy will move into what the Administration has already named Phase III: economic recovery.

* "Guideline" has become something of a Democratic economists' buzz word, and the Nixon White House prefers "yardstick." Indeed, the White House is proudly passing out 36-in. wooden rulers bearing the motto: "Follow the Yardstick to a New Prosperity."

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