Carter's First Big Test

Reality is closing in fast on the Carter Administration. For nearly three months the President has effectively built up political capital by assiduously courting public support. Now comes the time when he must start spending that capital and risk losing a great deal of it.

This week, on his 91st day in office, Jimmy Carter will unveil his controversial energy conservation program--the most comprehensive ever proposed by a President. The energy package reaches from automobiles to attics and from vacuum cleaners to wellheads in an effort to end America's profligate use of energy. It is almost certain to ignite a firestorm of protest--and to provide Carter with his most difficult test as a politician and as Chief Executive. Predicts chief Carter Aide Hamilton Jordan: "This will be a measure of Carter's ability to lead the country. It is a greater test of his leadership than any other single issue."

Energy policy is not the only problem coming to a head for the Administration. Last week Carter reversed himself by abandoning his quick-fix approach to stimulating the economy with a $50 tax rebate for nearly every American. Having finished his review of 32 dams and other water projects that he had threatened to cancel, he again reversed himself by reprieving about a third of them outright and agreeing to the completion of parts of another third; he insisted that the rest be scrapped. He announced a mild anti-inflation program that offended neither labor leaders nor businessmen.

He conferred with Defense Secretary Harold Brown and others on the next steps in negotiations with the Soviet Union on a new treaty to limit nuclear arms. What is more, he and his lieutenants are in the midst of formulating new policies covering trade, taxes, welfare, agriculture and public works.

Carter's pell-mell pace is reflected in an extraordinarily crowded schedule of public appearances. During nine days stretching into late this week, he will have held three press conferences, conducted a fireside chat and addressed Congress.

Of all the intensely controversial issues before the country, the energy package is likely to generate the greatest tempest. Merely on the basis of leaked information, the program was already drawing heavy fire last week from labor leaders, the petroleum, coal and auto industries, and Congress. Small wonder, since the plan will raise fundamental questions about Americans' automobile-centered life-styles and their free-enterprise industrial system based on cheap and plentiful energy. A classic donnybrook is in the making, with the outcome very much in doubt.

Carter has prepared for the fight as thoroughly as he planned the campaign that took him from Plains, Ga., to the White House. His aggressive salesmanship was to begin with a televised speech Monday night that some aides call a "sky is falling" message. In it, Carter hoped to convince Americans that the energy crisis is worse than most of them think. He also planned to cite a still-classified Central Intelligence Agency report warning of worldwide oil shortages by 1985. Said Jordan: "The impression has to be made that this is a serious, permanent problem, and the changes and adjustments that we have to make in our life-styles also have to be permanent and serious." The President will outline his plan to Congress on Wednesday night. Two days later he will explain it further at a press conference.

THE ENERGY BATTLE. Carter's program is designed to put heavy pressure on Americans to conserve energy, chiefly by increasing the cost of gasoline, heating oil and natural gas (for details, see box). Highlights as of last week:

> Authority to raise gasoline taxes, now 4-c- a gallon, by as much as 50-c- over ten years if consumption continues to go up at unacceptable rates.

> Gradual tax increases to boost the price of domestic oil (roughly $8 a barrel) to that of imported oil, which is now about $14.50 a barrel.

> A 31-c- hike in the federally controlled wellhead price of natural gas produced after Jan. 1, which would raise it to $1.75 per 1,000cu. ft.

> Taxes of up to $2,500 on the purchase of cars with poor gas mileage, and rebates of up to $500 for the purchase of cars with good gas mileage.

> A refund to consumers from the new taxes on gasoline and oil, perhaps through income tax rebates, lower social security taxes or grants to states that reduce their sales taxes.

Although the main outlines of the package were established, Carter and Energy Chief James Schlesinger were scheduled to work on details throughout the weekend and perhaps until shortly before the package is delivered to Congress. But early drafts leaked out last week and, despite the Administration's insistence that some published reports were "four drafts old," they stirred a hornet's nest of protest. In general, businessmen faulted Carter for not eliminating Government controls on energy prices altogether, thereby letting free market forces raise prices to levels that would encourage more production. They also fear that the program will slow economic growth. Other objections:

> New gasoline taxes might help to cut consumption but would offer producers no incentives to look for more oil. Declared A.V. Jones Jr., president of the Independent Petroleum Association: "The capital flow that this industry needs will be going to the Government. I just want to beg him, 'Say it ain't so, Jimmy.' "

> Higher price ceilings for domestic oil and natural gas will not be enough inducement for producers who want the Government to end price controls altogether. Said Dallas Gasman D.K. Davis: "There are some incentives but not enough for what drilling people would like--a full-out drilling boom." In addition, adds Davis, producers argue that even a price of $1.75 per 1,000 cu. ft. for natural gas "is not going to have much impact. It won't get producers out drilling deep wells." Short of decontrol, the producers want a price of $2.25 or $2.40.

> Putting natural gas produced and sold within the same state under federal price controls for the first time will discourage new drilling because the effect will be to cut prices in states like Texas and Louisiana, where gas has been selling for $2 per 1,000 cu. ft.

> Inducing industry to switch from natural gas and oil to coal may be difficult if the Administration refuses to relax environmental restrictions on mining and burning coal. Said Carl Bagge, president of the National Coal Association: "It's going to create more confusion and greater uncertainty."

> Penalizing owners of gas-guzzling cars with heavy taxes may depress the auto industry and increase unemployment. General Motors Chairman Thomas Murphy calls the plan "one of the most simplistic, irresponsible and shortsighted ideas ever conceived." Said Douglas Fraser, a shoo-in as the next president of the United Auto Workers: "Auto workers should not accept a disproportionate share of the burden."

> Rebates for small cars may not greatly increase their sales. Said Henry Ford II: "Nobody wants 'em."

> The program should be tougher, with more mandatory controls and less use of tax hikes to force conservation. Robert Nathan, a Washington economic consultant and also a member of the TIME Board of Economists, believes cars that get less than 15 miles to a gallon of gasoline should be banned. He would prohibit construction of buildings that waste energy. He also argues that utility companies should be prohibited from burning natural gas to generate electricity. But, he added, "if you can't do it any other way, then do it by tax."

> The whole package is too inflationary. Treasury Secretary W. Michael Blumenthal, Council of Economic Advisers Chairman Charles Schultze and Budget Director Bert Lance feared that taxes on gasoline and big cars, as well as provisions to force industry to install more efficient heating equipment and to switch from gas or oil to coal, would add dangerously to prices. Walter Heller, a member of the TIME Board of Economists, believes there should be measures to neutralize the program's inflationary effects, like cutting payroll taxes for employers.

Carter and his advisers convinced themselves in the end that the package would add only .5% to the inflation rate, although other economists think it may boost inflation by 2% or even 3%. In general, the Administration counters that decontrol across the board would have been even more inflationary and that huge profits for energy companies would be politically unacceptable. The Administration argues that it could not possibly please all interest groups and that everybody has to make some sacrifices for the general good. The big, already hotly debated question is whether the sacrifices demanded are the right ones (for the start of that debate, see the Special Report on Time Inc.'s Energy Conference).

One of Carter's allies in the energy fight is the pressure of time--Congress can hardly sidestep the looming crisis as it did when it buried Gerald Ford's modest energy program. Another is the President's popularity. Carter has predicted that his approval rating--72% in a Gallup poll released last week--may slip by as much as 15 points because of his energy package. He will still outstrip Congress in public esteem: the same Gallup poll gave it only a 36% approval rating. By taking his selling campaign to the public first, Carter hopes to increase the pressure on Congress to pass his proposals virtually unchanged. Yet he runs the risk of angering the Congressmen by going over their heads.

The original version of the energy plan was drawn up by Energy Chief James Schlesinger, who has been working almost seven days a week for the past three months with 15 top assistants. They consulted other top Administration officials so infrequently that Blumenthal and Schultze finally complained to Carter. Said a White House aide: "In the home stretch, there was a feeling by some people--not perhaps altogether justified--that the policy had been cooked up between Carter and Schlesinger and that other people hadn't had a fair shot at it." To calm these fears, Carter held a series of meetings at which high-level officials debated the energy proposals with Schlesinger.

Despite the two weeks of intense internal debate, said a White House aide, "Schlesinger's proposals--and Carter's support for them--remained basically intact." Major last-minute modifications designed to make the package more attractive to congressional opponents seemed unlikely. Said a presidential aide: "We're not incorporating a lot of tradeoffs. We can make some adjustments, but basically we want what we will send up to the Hill." Added Jordan: "The premise all along was that we needed the policy and that to be effective, it needed to be tough."

DEATH TO A QUICK FIX. Carter's expectation of a make-or-break fight with Congress over energy was a major reason for his decision to jettison two major elements of his quick-fix program to stimulate the economy: 1) the $50 tax rebate and 2) $2 billion in extra tax incentives for businessmen to hire new employees and spend for new plant and equipment.

From the first, the rebates had run into heavy opposition. To Louisiana Senator Russell Long, chairman of the Finance Committee, the rebate plan was "sort of like throwing bushels of $50 bills off the top of the Washington Monument in a high wind." But Blumenthal advised the Democrats to "hold your nose and vote for it." Even so, there was much talk in congressional cloakrooms of the "you kill our dams and we'll kill your rebate" variety. Arkansas Democratic Senator Dale Bumpers claimed that he had 52 votes against the rebate --enough to have defeated it. Had the bill gone back to the House, conceded Speaker Tip O'Neill, "we'd have had difficulty."

Misgivings about the stimulus program multiplied when the economy began recovering without its help, as many economists had predicted it would all along. Retail sales bounced back nicely from the winter slowdown: through March, they ran 11% higher than in the first quarter of 1976. Industrial production rose by 1.4% in March, the biggest increase in 19 months. The unemployment rate eased slightly in the same month, to 7.3%.

On Monday of last week, after seeing retail sales figures for March (up 2.4% from February), Blumenthal telephoned Lance. The two agreed that the scales had tipped against the rebate. Next morning they talked with Carter about it, and the following day Carter convened another meeting in the Roosevelt Room. This one lasted three hours.

Only Schultze, the primary sponsor of the tax rebates when they were conceived in December, was reluctant to abandon them. Even so, said a White House insider, "he came from 100% support down to 60%." Some political advisers wondered aloud whether, as one put it, "we shouldn't go ahead and try [for the rebate], just to show we can win." But the economic arguments convinced them that dropping the rebates would be a politically inexpensive way to show that the Administration was willing to meet Congress halfway.

But Carter delayed his final decision for a few more hours. That put Blumenthal in an awkward position. Unable to back out of a lunchtime speaking engagement at the National Press Club, he was asked whether the rebates were still needed. He tried to hedge in his answer but, out of loyalty to the President, nonetheless argued in favor of them. A few hours later, Carter decided to abandon the rebates. So as to appear evenhanded, he also withdrew his proposed tax incentives for businesses. But he vowed to fight for the remaining parts of the economic package, most notably $1.7 billion to create jobs and $4 billion in tax cuts for single people who earn $15,000 or less a year and couples who earn no more than $17,500.

Carter maintained that his reasons for ditching the rebate scheme were chiefly economic. "I did not back off because I feared political defeat," he said. "We just don't need it." Tripping over his logic, he added that the rebate would not have been inflationary, nevertheless. He insisted that the rebates could have been pushed through the Senate. Perhaps so, but the cost in good will and political capital--needed to get his energy proposals through Congress--would have been enormous.

Said Press Secretary Jody Powell.

"The timing just wasn't right. We could have won, but the question was whether the program really justified such an effort any more." He added, however, that if Carter had thought the rebates would help the economy, "he would have fought for them no matter how much opposition there was." Said Carter: "I've been accused of a lot of things, but I don't believe anyone has ever accused me of being afraid of a fight or of being too quick to compromise."

Still, the turn-around did allay fears that Carter could not compromise. He showed that he was not too proud to yield when his case was weakening and when obstinacy might jeopardize something more important.

His flip-flop on the rebate cost him some support. Many people had already made plans for spending their rebates. A few Congressmen felt betrayed. But most congressional leaders applauded Carter. Senate Majority Leader Robert Byrd said the President had made a "wise decision." Liberal Republican Senator Jacob Javits of New York called it "prudent and courageous."

MODESTLY AGAINST INFLATION. A day after announcing his abandonment of the $50 folly, Carter called his second press conference of the week, to disclose his anti-inflation program. As previously reported (TIME, April 18), it will rely chiefly on voluntary restraint by labor and management to keep prices down. At Carter's invitation, AFL-CIO President George Meany and General Electric Chairman Reginald Jones will help coordinate the private sector's antiinflation efforts. For its part, the Government will try to balance the budget by 1981, hold down unnecessary spending, moderate fluctuations in food supplies and other basic commodities, and slow increases in hospital costs.

The program includes no wage and price controls, no guidelines or targets for price and pay hikes -- which pleased many businessmen. Carter's economic advisers maintain that mandatory controls would not work. Some businessmen and economists doubted that Carter's voluntary program would have much impact on the current 6% rate of inflation, let alone enable him to reach his goal of slashing it by 2 percentage points by the end of 1979. But no one expected him to come up with a more effective plan. Said Harvard Economist Otto Eckstein, a member of the TIME Board of Economists: "The President has done what he can. There is no support for any other program."

Carter's aides had hoped that his mild anti-inflation program and his retreat on the $50 tax rebate would help boost businessmen's confidence in the Administration. That does not seem to have happened. Businessmen were generally happy with Carter's continued rejection of controls and his dumping of the rebates. Said Wall Street Investment Banker Sherman Lewis of Loeb, Rhoades & Co.: "It shows that maybe he is a little slow, but he is smart. The guy is willing to admit when he is wrong."

Businessmen were generally angry, however, about Carter's decision to abandon the proposed increases in the investment tax credit. Many of them believe that higher credits are the best way to ensure full economic recovery. Said William Shesky, president of the Bostonian Shoe Co.: "The real approach to attacking inflation is through the private sector, by increasing productivity." But interviews by TIME correspondents across the country indicated that businessmen probably would have continued to mistrust Carter in any event. One reason: many businessmen fear that he will turn out to be a big-spending liberal in spite of his conservative economic views. Whether that is a sensible fear is questionable. Carter has so far proved far more cautious in his economic policy (even taking into consideration the rebate plan) than any other Democratic President imaginable.

With the economic decisions behind him, Carter was free to focus most of his attention on the fight over energy. To improve the package's chances of passing the House despite the opposition of numerous powerful special interests, Tip O'Neill will assign it to a special committee headed by a friendly Democrat, Thomas Ashley of Ohio. Ashley in turn will farm out parts of it to seven House committees, which will be required to act within 75 or 90 days. In this way, O'Neill hopes to prevent opponents from blocking any elements of the package from reaching the House floor. He has also advised the White House to pull out all the stops in lobbying for the package. Said he: "I'm not going to be able to sell this by myself. I need every bit of help that I can get." At O'Neill's urging, Schlesinger has already met personally with 40 House members who seemed likely to oppose the energy package. Said O'Neill: "He's been absolutely terrific."

But members of Congress will also be listening to their constituents, and most Americans feel no sense of urgency about energy. Memories of last winter's fuel shortages have dimmed. The Gallup poll finds that only 45% of the public think that the energy situation is worse .than "fairly serious." Reported TIME Correspondent Neil MacNeil, who has covered Congress for more than a quarter-century: "It's going to be tough for a Congressman to vote to punish his constituents when they can't see why. Historically, Americans don't mend the roof when the sun is shining, so there's reason for skepticism on whether Congress will go along with the President."

Building a national sense of urgency about the energy situation will take considerable powers of persuasion -- but then, Jimmy Carter seems as adept at using the bully pulpit of the presidency to persuade people as anyone since Teddy Roosevelt and his distant cousin Franklin. Carter seems almost to relish the coming combat. As he said last week, he intends to "convince the American people of the truth, using whatever means that I have at my command." Added Carter: "I believe that when they see the truth, they will cooperate in trying to cut down the waste of energy." This may be a tall order. But old hands in Washington, mindful of Carter's rapid rise from obscurity, are by no means ready to count him out.

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