The Lasting, Multiple Hassles of Topic A

Although public and political anger lately has focused against rising food prices (see cover), that concern by no means measures the full extent to which resurging inflation has become U.S. Topic A. In recent days, Congressmen have opened a drive to force President Nixon to freeze or even roll back prices, interest and rents, home builders have staged a march on Washington to protest soaring lumber prices, the Government has won a dubious victory in a battle with bankers over the price of loan money, and labor leaders have begun presenting demands that could give a new spin to the wage-price spiral. It hardly seems likely that President Nixon's imposition of price ceilings on beef, pork and lamb last week--which already is being called by Democrats too little and too late--will make these multiple hassles die down.

Anger in Congress

The President's food-price announcement definitely did not quiet angry voices in Congress and the labor movement that are calling for far more drastic action. Said Representative Leonor K. Sullivan, a Missouri Democrat: "The President, after issuing dire warnings about the dangers of controlling meat prices, did it. How can we believe all these dire warnings about the dangers of controlling interest rates and other areas?" Like her, Congressmen and labor leaders have become convinced that the only way to stop a debilitating new round of inflation is for the President in effect to declare his entire Phase III program an abject failure and impose a freeze on all prices and wages for the second time in 20 months. They may not be able to force Nixon to go that far, but there is a growing probability that he will be required to tighten up at least some Phase III rules besides those for meat.

Congress at present holds something of a whip hand in the debate because Nixon's statutory authority to regulate prices and wages expires at the end of the month. The White House is seeking a one-year carbon-copy extension of the Economic Stabilization Act, which gave the President blanket permission "to issue such orders and regulations as he may deem appropriate to stabilize" pay and prices. Should Congress simply renew that power, Nixon could obviously proceed with Phase III pretty much as he pleases. But more and more members of the congressional Democratic majority are determined to sprinkle the bill with amendments requiring enforcement of mandatory controls on sections of the economy that are now regulated on a largely voluntary basis or are entirely decontrolled.

By a vote of 50 to 38, the Senate has already passed an amendment that would reimpose rent controls in cities with a vacancy rate of 5.5% or less--which would affect nearly every major metropolitan area. Landlords in such cities would be limited to rent increases of 2 1/2% or less annually, plus amounts to cover higher taxes or other costs. Another amendment that would have mandated a freeze in interest rates was defeated by only five votes. The Administration had been counting on the House to cut out the rent-control provision, but last week Republican members of the House Banking Committee privately warned John T. Dunlop, the President's Cost of Living Council director, that the lower chamber might well enact even farther-reaching controls than the Senate had.

The committee's star witness was AFL-CIO President George Meany, who did not quite sound like the Nixon buddy of recent public appearances. If the wife of "Joe Doakes" cannot pay her bills, Meany warned, "he'll look for higher wages. But the answer is not to get 12% to 15% in wages. The answer is to hold down food costs and other costs." To do so, Meany proposed a World War Il-style controls program that would include a ceiling on profits and Government allocation of credit as well as stiff wage-price guidelines. Committee Chairman Wright Patman favors a stern program that would roll back rents to the levels of Jan. 10 (the last day of Phase II), freeze prices and interest rates across the board for 60 days at the levels of March 16, and then give way to stringent controls.

The Administration is hardly without its own weapons in the accelerating fight over controls. The nation's economy is rolling along in high gear, and Nixon could blame any future lurches on legislative tampering, if Congress does indeed give him specific orders to impose broader controls. Moreover, the President is clearly betting that his meat-price ceiling will soothe public alarm about inflation enough to ease the pressure on Capitol Hill for more sweeping measures. Even so, Phase Ill's dismal Act I has turned what once looked like a routine legislative chore for the Administration into another suspenseful confrontation with Congress.

The Lumber Mess

In the waning days of Phase II, lumber was often cited as a classic example of how controls breed chaos; under Phase III, it has become a standout illustration of how the loosening of controls can make a bad situation worse. During the period of mandatory controls, lumber prices were supposed to be held close to the relatively low level at which they had been caught by the 1971 price freeze, but as home-building demand soared shortages developed, and loopholes in the Phase II regulations allowed mills to sell the same types of wood at vastly different quotes. Trying to cut through the confusion, the drafters of Phase III designed a special provision allowing higher-than-normal lumber-price boosts if they seemed necessary to ensure "efficient allocation of resources." Result: an inflationary spiral that is causing more worry than anything except the jump in food prices--and is finally beginning to force official action.

Since Phase III began 2 1/2 months ago, the wholesale price of hem-fir two-by-fours, a key housebuilding product, has leaped 23%, to $190 per 1,000 board feet; interior-grade plywood prices have gone up 99%. Such Paul Bunyanesque increases, according to the National Association of Home Builders, have driven up the price of an average new house by $1,480 in the past nine months. Worried builders recently staged an intensive one-day lobbying campaign, billed as a "march on Washington," to demand a halt to the increases. Last week they got action: Cost of Living Council Director John T. Dunlop announced that the Government will step up the sale of timber cut on federal land and seek a "voluntary" agreement from the Japanese to restrain their rapidly rising purchases of U.S. lumber. In addition, said Dunlop, the Administration will move to break a shipping bottleneck, caused in part by the massive freight-car requirements of the Russian wheat deal, that has aggravated the lumber shortage on the East Coast--though he did not say exactly how. Finally, said Dunlop, the Government might even consider reimposing Phase II-style controls, unsatisfactory though they were.

How much those steps can help remains to be seen. Exports to Japan, where home building is also a boom industry, have indeed been a problem. Not only are the Japanese hauling away wood that American builders want, but their aggressive bidding has sometimes driven up prices. Lumbermen contend, however, that much of the shortage can be blamed on Washington rather than Tokyo. The U.S. Forest Service, which manages federal lands producing 27% of the nation's softwood timber, must by law conduct complex soil and land-use surveys called for by ecologists before selecting trees that commercial loggers can cut; the cost of selection has more than doubled over the past seven years. The new expenses have caused the Service to fall so far behind in its work that production of timber from federal land is running as much as 50% below schedule.

Recent Government actions suggest that the industry cannot entirely escape blame for the price spiral, either. During Phase II the Internal Revenue Service forced several Pacific Northwest companies to roll back allegedly illegal price boosts, and in March the Federal Trade Commission accused some of the biggest lumber firms of regularly charging customers for shipping costs not actually incurred; the companies replied that the FTC had simply misunderstood the way they calculate prices. Whoever is most at fault for the present lumber mess, the best hope for stopping the runaway price boosts may lie in an expected slowdown in the pace of U.S. home building, which should take some of the fever out of demand.

The High Price For Peace

Rarely has a year of major labor negotiations opened with so little strike talk. Leaders of many of the 4.7 million workers whose union contracts expire this year sound unusually hopeful that the company heads whom they will face across the bargaining table will settle peacefully rather than take strikes that in today's booming economy would cause a painful loss of profits. But no one can guarantee that the quiet will last; many union demands are high enough to be potentially troublesome.

An early, and perhaps extreme, indication of the mood: the United Steelworkers of America, whose contracts with steel mills still have 16 months to go, last week concluded an agreement designed to prevent a strike at least until 1977. For openers, steel mills will pay each worker a $150 bonus in 1974 and distribute a basic wage increase of 3% in each of the next three years. But the union regards the 3% only as a "floor" from which it expects to negotiate further raises. If the two sides cannot agree on how much more than 3% workers should get, the dispute will be sent to a five-member board of arbitrators for a binding decision.

If labor peace prevails in the rest of the economy, its price could be high, especially since production and profits are rising swiftly. Unless the Administration's new ceiling on meat prices brings substantially lower living costs, many union men fear that inflation will swallow a big chunk of whatever pay raises they get. If prices stay high, labor leaders have no intention of settling for anything so modest as the 6.2% annual increase in wages and fringe benefits specified under Nixon Administration guidelines. Says James J. Matles, general secretary of the United Electrical Workers, who began bargaining with General Electric last week: "We are negotiating for the needs of people, not on the basis of any Nixon formula."

That philosophy will soon get its first major test. On April 20, contracts expire between the United Rubber Workers and Goodyear, Goodrich, Firestone and Uniroyal. U.R.W. President Peter Bommarito is demanding pay and fringe hikes averaging more than 8% annually over the next three years. Among other things, the 87,000 rubber workers want the right to retire on full pensions after 25 years of service, regardless of age, and payments to workers left jobless when plants relocate.

Escalator. The G.E. talks are bringing up what is expected to be a key demand in many union negotiations this year: an unrestricted cost-of-living "escalator." Under such a clause, workers' pay is automatically increased to reflect the full rise in consumer prices that occurs during the life of the contract. In quiet times, such a clause can be relatively inexpensive--but during a period of swift inflation it can make the wage-price spiral spin all the faster. The U.E. and International Union of Electrical Workers won only a limited escalator after striking G.E. for 14 weeks in 1969-70, and have collected 24-c- an hour in cost-of-living adjustments since then; had there been no limit, the rise would have been 53-c-. The unions demand that G.E. now add the "missing" 29-c- to wage scales before negotiations on pay even begin. Union chiefs so far are pleased that G.E. negotiators, who are widely regarded as just about the toughest management bargainers in the country, are showing an unusual willingness to listen. But the unionists are wary. Matles warns that if G.E. is no more generous than in the past, "there will be trouble again."

The biggest negotiations of 1973 will pit the United Auto Workers against the Detroit car makers. Though contracts do not expire until September, U.A.W. President Leonard Woodcock began spelling out some demands late last month at a prebargaining convention in Detroit. Among them: a more generous cost-of-living escalator, some kind of profit-sharing plan, and by far the most important, a new right for workers to refuse to put in overtime. Heavy overtime has enabled a few workers to earn as much as $20,000 a year, but many complain that the long hours leave them too exhausted to enjoy the money. Meeting that demand would be costly to the companies: it could cause production delays, force the hiring of many more workers, or both. Malcolm Denise, Ford's chief negotiator, warns that if the U.A.W. is serious, it "could be on a collision course" with management. Woodcock's retort: "So be it."

A Split Prime?

Almost the only price in the economy that went down last week was the "prime" interest rate that banks charge on loans to the most creditworthy business borrowers. Bowing to furious jawboning by Federal Reserve Board Chairman Arthur Burns, such major banks as Chase Manhattan, Manufacturers Hanover Trust and First Pennsylvania Banking and Trust Co., which had hiked the prime rate two weeks ago, grudgingly pared it by one-fourth of a percentage point to 6 1/2%. But several banks made it clear that they would go back up to 6 3/4% at the first chance. Burns won his shaky victory by reminding the bankers that Texas Democratic Representative Wright Patman, their perennial bete noire, is trying to get Congress to legislate a mandatory freeze on interest rates.

With Patman in effect waiting in the wings, Burns then elaborated a plan for a split prime rate that he believes could take the political heat off the banks. He promised to have specific guidelines ready within a month. Under his program, the cost of loans to giant corporations, which can tap the bond or stock markets for money when that seems better than borrowing from banks, will be keyed to the movement of other interest rates. Right now, that would be sharply up. The prime rate for smaller businesses--say those seeking bank loans of less than $500,000--would not be allowed to climb nearly as fast. In order to ensure that the big firms do not get the lion's share of available loan money, the guidelines will probably include a requirement that banks make a substantial percentage of their loans to small businesses (including those too small to qualify for the prime rate at all), and individuals seeking mortgage, auto-purchase and personal loans.

Presuming that they are obeyed, the guidelines will crimp bank profits by holding rates on many loans below the level that they would reach if there were no restrictions. Even so, the new system, which by no means satisfies Patman, might be an improvement on present conditions. Right now, banks complain, money that they would like to reserve for loans to small businesses and consumers is being swallowed by big corporations rushing to borrow at a bargain prime rate; the 6 1/2% prime that Burns has temporarily forced down the banks' throats is significantly lower than the 7% or so that the corporations would have to pay if they sold commercial paper, a form of unsecured IOU, to investors. But Burns is building dikes against a rising tide. So long as the economy booms and the Federal Reserve exercises some restraint in pumping out new money, the price of loans, as Burns and Patman both know, will trend inexorably upward.

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