Trouble on Margins

On Aug. 15, the Nixon Administration will celebrate the first anniversary of wage-price controls--but celebrate may not be quite the word. The date also happens to be the deadline for companies with annual revenues of $50 million or more to submit second-quarter profit reports to the Price Commission. Those filings could touch off the first serious clash between price controllers and business executives.

The problem is a regulation that companies winning permission to raise prices must not push their profit margins--that is, their percentage of profit on each dollar of sales--above those of a base period. If they do, they must cut prices. For most companies, the base is the average of the two best years in the period from 1968 through 1970. So far, this rule has not hurt industry much; corporate profits surged to a record rate in the first quarter (see chart) without subjecting too many companies to rollbacks, and even those firms have not necessarily suffered. In order to get within its profit-margin ceiling, Bruno's

Food Stores, a 31 -supermarket chain based in Birmingham, had to institute bargain-basement prices: 990 per Ib. for choice steak, $1.07 for three pounds of coffee. "It is O.K. with me," says Owner Joe Bruno. Since the price cuts, sales have zoomed.

The second-quarter reports, however, are expected to disclose many more companies exceeding their profit-margin ceilings. Alan Greenspan, a member of TIME'S Board of Economists, figures that sooner or later at least one company in every major industry will pierce its ceiling and be forced to cut prices. That, he fears, will be enough to crimp corporate profits generally, because price reductions by one company would have to be followed by all its competitors --including some with narrow profit margins that would be further squeezed.

Businessmen then would likely scream for relief, and Nixon and his advisers would face an awkward dilemma. If they ordered the Price Commission to relent, they would risk angering consumers, but if they let the commission go ahead, businessmen might cut back on expansion plans for fear of being caught in a profit squeeze, thus chilling the economy's recovery.

Some things can be done to avert a showdown. Companies in danger of bumping against their profit-margin ceilings could pour more money into such activities as advertising and research and development, thereby reducing immediate profits but also perhaps increasing their share of the market. Willard F. Rockwell Jr., chairman of Rockwell Manufacturing Co., Pittsburgh-based maker of valves, meters and power tools, views the necessity of complying with margin ceilings as a chance to "give my competitors a good kick in the pants."

Necessary Sin. The Price Commission, for its part, could lengthen the base period for some companies, allowing them to include 1967 and possibly 1966 profit margins when figuring their ceilings. That would give a welcome break to corporations that earned only skimpy profits between 1968 and 1970, and are now in danger of breaking through their ceilings long before they regain prosperity. Some economists suspect that the commission may also have to start regulating prices on an industry-by-industry rather than company-by-company basis. Such a collective approach might seem to sin against Commission Chairman C. Jackson Grayson's desire to use price controls to promote hot competition, but it might prove the only way to retain both effective government price controls and business support of the program.

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