This Season's Game Plan: Semi-Tough

Mind-bendingly complicated and openly mocked, Phase IV, a product of necessity, was born last week. Even its authors have reservations about its chances for success. The latest wage-price control program in the Nixon Administration's 23-month alternately hot and cold war against high living costs is a temporary holding action. It is designed to stem the spread of food shortages while partially holding off the pent-up forces of inflation until they are weakened by waning demand (see box next page).

Though immeasurably better than flabby Phase III and slightly tougher in some ways than the relatively successful Phase II, the latest controls are by no means as stiff as the Administration had hinted they would be. They allow farmers to sell for whatever the market will bear; they continue earlier wage guidelines; and despite some tightening on profit margins, they will pinch most corporate earnings only slightly. Phase IV should slow the rising price spiral, but there is little chance it will lower inflation to acceptable levels this year.

For most industries the new rules will take hold on Aug. 12. Until then the price freeze will remain in effect. But food processors and food sellers, doctors, dentists and hospitals will immediately go under the more flexible Phase IV rules. Wholesale food prices began rising only hours after the announcement of Phase IV, which permits processors, wholesalers and retailers to pass on the entire increase in the cost of raw farm goods. Supermarket executives hastily called meetings to set price increases, which will begin to show up on shelves early this week. Some items may jump as much as 15% or more.

In the next several weeks, already rebellious consumers will be asked to pay as much as 900 to $1 per dozen for eggs, 800 per lb. for broiler chickens and $2 per lb. for pork chops and bacon. Lettuce, tomatoes, fresh fruit and other perishables will rise immediately. Also likely to leap are prices for cereals, flour and other wheat and corn products, oils, many canned goods and frozen foods. When the freeze ends in August, prices of many other items will go up.

Beef Freeze. One major reason for the food price rises is that spiraling costs of animal feed, caused largely by unbridled grain exports, especially to Russia, have prompted farmers to raise less livestock than they had planned. The price freeze resulted in even lower production of hogs and chickens. Phase IV regulations, which will keep beef prices frozen until Sept. 12, will further hold down beef production. Explains Bill Jones, executive vice president of the National Livestock Feeders Association: "This blunder is likely to jeopardize supplies because feeders will hold their cattle off the market until after Sept. 12 to get a better price."

To pile up supplies and bring down prices over the longer term, the Administration will remove, for the first time since the Korean War, all production controls on such basic crops as wheat, cotton and livestock feeds.

Despite predictions of a bumper crop, export controls will stay in place until the fall to prevent a rush by foreigners to buy U.S. farm goods at bargain prices with undervalued American dollars.

For sheer complexity, Phase IV exceeds all the former controls programs.

Some areas of the economy--such as the lumber industry, public utilities and real estate--will be exempt from price controls. There will be separate sets of regulations for construction and insurance. The program proposes a two-price system for crude oil aimed at keeping prices down while creating incentives for greater output. Prices for "old" production--the amount of oil a company produces equal to its output in 1972 --would be held to May 15 levels.

"New" production, I.e., any amount over the 1972 volume, will avoid the May ceiling.

Piling confusion on top of complexity, Cost of Living Council Director John Dunlop confirmed that many more price exceptions would be granted to companies under Phase IV than were granted previously because it is more "stringent." To try to enforce the rules, the council will have a staff of at least 5,000--1,200 more than in Phase II--to curb abuses. Phase IV's convoluted design prompted Georgia's Democratic Governor Jimmy Carter to label it a "continuation of Nixon's slapstick approach to a highly complicated situation ... a whole mishmash of hit-and-miss decisions."

In general, industrial and service corporations that have annual sales of $100 million or more will have to notify the COLC 30 days in advance of any price hike and justify the increase with proof of cost increases. Firms with sales of $50 million to $100 million will merely have to report all price boosts to the Government quarterly, and companies with less than $50 million must file annual reports. Companies will be allowed to pass on to their customers all the increased costs of material, labor and overhead. But they will not be permitted to raise their prices by still an additional amount to maintain the same profit margin. Thus corporations will not be badly pinched by the controls, but prices will continue to rise. The "flexible" guidelines on wages are unchanged; nominally they limit pay and benefit increases to 6.2%, but increases of more than 7% have gone unchallenged.

Lost Illusions. The new program generated little enthusiasm among most businessmen or consumers, who are growing increasingly restive with controls that do not work. "The best of all phases would have been a phase-out of controls," argues Walter Wriston, chairman of Manhattan's First National City Bank. United Brands President Eli Black believes Phase IV is "a step in the right direction," but he would like all controls dismantled within the next six to nine months. Says Brooks Walker Jr., chairman of San Francisco's U.S. Leasing International: "At least it proves that they are alive, if not well, in Washington."

In the past, the start of a new anti-inflation program was usually the signal for an outpouring of optimistic predictions by the Administration's economic policymakers. This time the mood was subdued. Announcing Phase IV, Treasury Secretary George Shultz noted that the inaccurate forecasting in the past "leaves you a little humble." More remarkable was the rare admission of failure that President Nixon issued from his hospital bed. Nixon conceded: "Confidence in our management of our fiscal affairs is low, at home and abroad." As to the freeze, which the President imposed against the advice of his aides, he said: "The freeze is holding down production and creating shortages that threaten to get worse." In a feeble echo of his former self. Nixon concluded: "We should not despair of our plight."

The President's real hopes for straightening out the economy rest with sensible spending, taxing and monetary policies. The root of inflation can be found in the $63 billion of deficits the Government has run in the past three years. To finance them, the Federal Reserve Board has had to create substantial amounts of new money. In fiscal 1973, the President managed to hold spending below $249 billion and cut the deficit to $17 billion, from the previous year's $23 billion. In the current fiscal year, Nixon aims for a balanced budget, which will mean holding spending to $268.7 billion. That will require cuts in some programs, but pocketbook-pinched Americans will at least be iii spared a tax increase. The Administration decided against including a tax rise in Phase IV, fearing that it would be "fiscal overkill" that could tip the economy into recession.

Nixon and his chief economic aides have made no secret of their distaste for price controls and their deep desire to chuck them by year's end. But to make Phase IV succeed, the Administration must show a genuine determination to enforce the new regulations. Thus the instant emphasis on granting price exceptions and removing controls as soon as possible bodes ill for the program's success. With the Administration showing so little faith in Phase IV, it can hardly expect the rest of the nation to have confidence that it will work.

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