TIME: Almanac 1993/TIME Almanac 1993.iso/time/election/72elect/72elect.018

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                                                                                June 25, 1973

INFLATION

Freeze II: Back to the Drawing Board


     "Oh, everybody thinks Phase III was a failure. Let's move
on."

     With more than a touch of bitter resignation, Treasury
Secretary George Shultz last week this delivered the epitaph
for the Administration's five-month-old attempt to control
inflation on the honor system, of which he was the chief
ideologue. An hour later, in a nationwide TV speech, President
Nixon did indeed move on -- with the second freeze since August
1971. He imposed a halt on increases in prices -- but not in
paychecks -- for up to 60 days. That will be followed, the
President promised, by a Phase IV with "tighter standards" and
"more mandatory compliance procedures" than those of the
discredited third phase.

     America First. The freeze was better by far than Phase III,
but many critics in Congress and in U.S. and foreign business
would have preferred a more permanent program -- which is now
up to two months away. The interim program was hurriedly slapped
together and seemed like a desperation move. The President and
his aides were drafting changes almost up to the moment that he
announced it. Even if, as seems likely, it accomplished a
temporary slowdown in price increases, the danger remains that
too much inflationary momentum has been built up for anything
less than an extremely tough Phase IV to curb it. Reason: the
President waited unconscionably long to take a new stand against
high prices. Since January, U.S. consumer process have spiraled
upward at an annual rate of 9.2% their worse rise in more than
two decades. The increases were even greater in the supermarket,
where prices have been inflating at an annual rate of 25% or
more -- and worse was ahead.

     Moreover, Nixon made a bid to gain vast new authority over
the nation's exports. He asked Congress to let him regulate the
overseas shipment of all "articles, commodities or products."
He could then personally limit overseas sales of wheat and
other grains, the rising demand for which Nixon blames for high
food prices at home. The nation would honor prior commitments.
But, said Nixon with some jingoism: "When we have shortages and
sharply rising prices of food at home, I have made this basic
decision: in allocating the products of America's farms between
markets abroad and those in the United States, we must put the
American consumer first."

     TIME Correspondent John Berry learned that the
Administration has even gone so far as to set targets for key
feed commodity prices -- all of them dramatically below those
prevailing. Samples: for soybeans delivered next November, the
target price is $4 per bu., down from $6.43 the day that Nixon
spoke; for wheat at Kansas City in July, $2 per bu., down from
$2.78. Thus, the Administration of enormous proportions.

     Gyrating Grain. The threat of export controls caused prices
on the nation's commodities markets, where speculators have
recently bid up prices to heights undreamed of only a year ago,
to gyrate widely. On Thursday, prices for major grains and
soybeans were "down the limit" -- they dropped as far as trading
rules permitted in a single day. The panic seemed to
substantiate Nixon's assessment of grain speculation as a root
cause of food inflation.

     Whether a U.S. President should be given the power to
regulate the nation's export faucet indefinitely, however, is
extremely doubtful. The use of such barriers to free trade
invites retaliation from injured foreign nations and fans
economic nationalism. Further, farm products constitute the
U.S.'s second biggest export after machinery -- $9.4 billion
worth last year. To limit their sale would only worsen the
nation's alarming balance of payments deficits.

     Many of the critics of the Administration's recent
do-little attitude toward inflation were pleased that Nixon had
finally decided to act and predicted that Freeze II would make
a member of TIME's Board of Economists, revised his estimate of
one measure of inflation -- called the G.N.P. deflator --
downward ever so slightly (to an annual rate of 4.3%) because
of the freeze and said that the move "has substantially reduced
the risk to our prosperity." Walter Heller, another member of
TIME's board, agreed: "We've broken through that mushiness and
moribundness, and now there's some flint and steel."

     Yet almost nowhere did the President's second resort to
anti-inflation shock treatment produce anything like the
widespread sense of relief, even enthusiasm that followed the
first. The cowering stock market sank even further into
despair. The Dow Jones industrial average lost 27 points on the
two trading days after Nixon's speech and closed the week at a
dismal 889.

     On world money markets, the undervalued dollar remained
distinctly anemic; in Frankfurt it fell to an alltime low of
2.57 marks, down 9% in just the past month. Economist Paul
Samuelson explained the lack of enthusiasm by complaining that
Nixon's sudden lurches from one set of rules to another add up
to "schizoid economics," and that "you use up" the effectiveness
of extreme measures like freezes. Raymond Jallow, senior vice
president of the United California Bank, worried that in the
current near-capacity economy a freeze "will create a bubble of
inflation" after it is over. AFL-CIO President George Meany
damned the freeze as a "failure of policy" and pointed out that
Nixon had frozen prices at a historic high point. Most
important, the fear remained that the economy's case of
Watergate woes is simply too serious to be remedied by yet
another White House program. "It's strictly a holding
operation," says Economist Sam Nakagama. "Nixon has pulled back
into a defensive position until Watergate blows over." Says
George Doup, president of the Indiana farm bureau: "You could
see, even during the President's presentation, that his heart
wasn't in it."

     Inner Circle. Neither, to put it mildly, are the hearts of
his top economic advisers. Free marketeer Shultz had argued
vehemently against anything more than minor changes in Phase
III. In fact, Shultz and Herbert Stein, chairman of the Council
of Economic Advisers, left for a bankers' meeting in Paris on
June 5 with the understanding that Nixon had decided on a
program far less drastic than the freeze. The next morning,
Nixon sent a memo to his advisers through Chief of Staff
Alexander Haig asking for new information on a variety of
economic matters. Administration aides speculated that the
President was persuaded to change course by Melvin Laird, who
had just signed up as Nixon's domestic affairs chief and
promptly advocated bold economic moves.

     Neither Shultz nor Stein plans to become active in the
Administration's public relations campaign to sell the program
to the nation, and they may decide to quit before long. Shultz,
a highly moral man, is also depressed over the Watergate
morass. Likewise, former Treasury Secretary John Connally, who
urged Nixon to act but apparently felt left out of the inner
circle, will quit his vaguely defined Administration job.

     The freeze will be run by a special group within the Cost
of Living Council headed by its deputy director, James W.
McLane, 34, a Harvard Business School graduate turned
bureaucrat. Stores will be required to keep a list of "freeze
prices," which are the highest levels that retailers charged for
at least 10% of sales on any given item or service between June
1 and June 8.

     Exempted altogether from the freeze are wages, which the
President correctly judged as being held to "responsible"
increases of some 5% a year -- without stiff controls. Rents,
interest rates and dividends are also exempted. Agriculture
prices at the farm level were left uncontrolled, though they
are anything but responsible. Any attempt to hold down a rising
price would lower farmers' incentives to solve the nation's
food problem by producing more. However, unlike the first
freeze, even raw agricultural goods are now price-controlled
after their first sale by the farmer to the distributor or
wholesaler.

     Against Narcotics. McLane said that "seven or nine"
industries will be specifically scrutinized in a "profits
sweep," because they are suspected of having exceeded Phase
III's price rules and may now face rollbacks. Two of the
industries are chemicals and electrical machinery. Businessmen
apparently also have decided that the freeze was for real. U.S.
Steel, Bethlehem Steel, Uniroyal, B.F. Goodrich and Kennecott
Copper canceled or postponed increases that had been put into
effect or scheduled.

     White House insiders say that the President really does
not know yet what should be done about Phase IV. He is all but
irrevocably committed to a program as tough as Phase II -- and
probably even tougher in the politically touchy areas of food
and gasoline prices. Phase IV will also likely be expanded to
include control on wages, profits and other areas.

     Nixon remains basically opposed to strong controls, and
promised to keep them from becoming a "narcotic." Yet, when the
current freeze ends, he will have presided over one or another
set of wage-price rules for about 40% of his term in office.
The President allowed his Administration's most effective
inflation- fighting team -- to be dismantled in January with
hardly a word of thanks. Though he bragged last week about the
exemplary 3.4% inflation rate that was posted during Phase II,
he will have a difficult time repeating the performance in the
next phase -- if, indeed, he has the will to try.

_______________________________________________________________
PHASE I

Aug. 15, 1971 - Nov. 13, 1971. WAGE-PRICE FREEZE

     A clampdown on nearly all pay and price increases, with the
major exception of unprocessed farm products. The Cost of
Living Council is created, with Treasury Secretary John Connally
as chairman, to enforce the freeze. Compliance is widespread,
though some unions complain that the rules are antilabor.

     EFFECTIVENESS: Excellent, inflation reduced to an annual
rate of 1.9%.


PHASE II

Nov. 14, 1971 - Jan. 11, 1973 WAGE-PRICE CONTROLS

     A system yardstick designed to keep inflation in firm
check. Wages are to rise no faster than 5.5% annually, prices
no more than 2.5%. Profit margins are controlled. Enforcement
is divided between the Pay Board and the Price Commission.
Compliance is mixed at first, then moves to within acceptable
distance of the goals.

     EFFECTIVENESS: Extremely good. Inflation cut to an annual
rate of 3.4%.


PHASE III

Jan. 11, 1973 - June 13, 1973 PARTIAL DECONTROL

     A move toward voluntarism in which Phase II's yardstick
are loosened. The Cost of Living Council, with Labor Economist
John T. Dunlop of Harvard as chairman, again handles enforcement
of both wage and price rules. Compliance is progressively less
complete, especially on price increases, with little objection
from COLC.

     EFFECTIVENESS: Terrible. Inflation sears to an annual rate
of 9.2%.


FREEZE II

June 13, 1973-? PRICE FREEZE

     A second ban on price -- though not wage -- increases for
up to 60 days, again with farm-level prices for feed products
exempt but not those beyond the farm level. Companies that
posted big price increases during Phase III will be audited, and
special attention given to retail feed and gas prices. COLC is
to enforce the freeze and plan Phase IV, which the President
promises will have "higher standards" than its predecessor.


PHASE IV

     ?