A Long Way from Waterloo

Despite a minor victory, the inflation war has just begun

It was a famous victory, the Carter Administration claimed last week. In point of fact, however, the price-setting action taken by Bethlehem Steel Corp., while encouraging, fell a good deal short of winning the Battle of Waterloo against inflation. Indeed, the very fact that the Administration singled out the incident for so much praise showed how long and difficult the campaign against inflation will be before the tide is turned.

After nearly a month of Administration prodding and pleading, Bethlehem, the nation's second largest steelmaker, announced that it would scale back an anticipated 7% price increase set for July to a flat 3%. Moreover, the company pledged to forgo any additional price hikes this year if the President's anti-inflation strategy of voluntary cooperation from industry and labor begins to slow the alarming spiral in the cost of living.

Bethlehem's promise, however conditional, was welcome news for Robert Strauss, the White House's chief jawboner. For the past two months, Strauss has been struggling to get industry to support the President's inflation program, which calls not only for executives to hold their own pay raises this year to less than 5% but also for companies to keep their 1978 price increases below the average of the past two years. A scattering of the nation's largest companies have agreed to cooperate on the question of executive salary increases, but until Bethlehem, only a few, such as Kaiser Aluminum and Ford Motor Co., have actually put a lid on prices as well.

Though Strauss promptly hailed Bethlehem's action as a "major breakthrough" and an example of "good corporate citizenship," its effect on inflation is likely to be largely symbolic. For one thing, the projected 3% increase comes on top of an April increase of 1.1% to offset the cost of the coal-strike settlement, and an earlier, 5.5% rise in February. Even if the company abides by its pledge, its 1978 price increases will still total more than the industry's 8.5% average in both 1976 and 1977. Meanwhile, the nation's three other largest steelmakers--U.S. Steel, Republic and National--last week wasted no time in trotting out follow-the-leader price increases of their own, and none saw fit to promise anything at all about additional rises later this year.

Clearly, the struggle against inflation is only beginning. The Administration has long since dumped its January forecast of a 1978 inflation rate of about 6%, and last week Treasury Secretary W. Michael Blumenthal conceded that the figure would probably wind up being closer to 7% at year's end. What is more, Charles Schultze, Carter's chief economic adviser, told a Paris press conference that the next twelve to 24 months will be decisive. If inflation is not brought under control in that time, he said, "one must take very seriously" the dangers of a recession. In a speech to the Air Line Pilots Association, Barry Bosworth, director of the White House Council on Wage and Price Stability (COWPS), was gloomier still. Said he: "I give the economy no more than six months. If we don't do something this year on inflation, we're going back into a recession." That could come about if the Federal Reserve were forced to continue pushing up interest rates to keep inflation from soaring out of control. Rising interest rates tend to cut back business activity. (Last week a number of major banks raised the rate they charge their best corporate customers from 8.5% to 8.75%, the highest since February 1975.)

In addition to jawboning business and industry executives, the Administration, only now beginning to coordinate its anti-inflation program, is tardily trying to cut back on spending. Having called in January for a $25 billion tax cut and a budget with $60.6 billion in deficit spending for fiscal 1979, Carter would like to see the red ink reduced to no more than $50 billion, and he is not opposing congressional efforts to slash the size of the tax cut to about $15 billion. Both steps should have been taken months ago, if not earlier. But making substantial cuts in the 1979 budget may prove to be next to impossible to do since Congress has already approved its basic outlines and has only three months left before it must, by law, send the final document to the White House. Meanwhile, Congress has added some $4 billion in new spending of its own to the budget. The addition would start funding water projects costing $1.4 billion that have already been approved by the House, although Carter has vowed to veto them.

The biggest and most crucial fight of all will be on the labor front. The Administration hopes to persuade unions to begin accepting wage settlements smaller than the 8.5% or more in annual increases they have become accustomed to during the past two years. So long as wages, which now account for some 70% of business overhead, continue rising at that rate, businessmen will continue to expect inflation to grow and will remain wary of pledging to hold down prices.

Many of the nation's big wage contracts will not expire until next year, but the outcome of talks now under way with the 450,000 railroad workers and the 560,000 employees of the Postal Service are being closely watched by union leaders as indicators of future trends. The Administration is optimistic that the postal workers, whose talks enter the hard-bargaining phase this week, will cooperate. The outcome of the railroad workers' negotiations is less certain. Their contract expired at the end of last year, and Bosworth fears that the new package might well reach 30% or so in increases over the next three years. If that happens, even companies like Bethlehem Steel would have a bona fide excuse to start raising their prices all over again.

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