Background

On June 13th, the President announced a Freeze on prices to last a maximum of sixty days. At that time, he indicated that the freeze period would be used to develop a new and more effective system of controls to follow the freeze. He specifically directed the Cost of Living Council to develop a Phase IV that would stabilize retail prices of both food and gasoline.

The President cautioned, however, that Phase IV would not be designed to get the U.S. permanently into a controlled economy. He promised to avoid action that would lead to rationing, black markets or a recession that would mean more unemployment. Finally, he emphasized that the real key to curbing food prices lies in increasing supplies rather than controls.

During the last month, Secretary Shultz, Chairman of the Cost of Living Council, other members of the Council, and Senior Staff officials of the Cost of Living Council have engaged in extensive consultations with consumers, businessmen, farmers, Congressional leaders, and government officials in all parts of the country. More than 30 meetings with over 400 individuals were conducted. In addition, the Cost of Living Council made available a list of 34 specific questions about the design of Phase IV. Businessmen, farmers and consumers were invited to submit written recommendations to the Cost of Living Council on the nature of Phase IV. More than 200 such proposals were received and fully reviewed. The recommendations ranged from complete elimination of controls to

establishment of a permanent system of ceiling prices, rationing and a 250,000 man enforcement agency.

Although the freeze was keeping prices stable at the retail levels, it was causing business shutdowns and unemployment, resulting in supply shortages in some sectors.

Among the problems created by the freeze were situations where the cost of producing or distributing goods was above the freeze price. Confectioners, processed grain millers, poultry and egg producers, margarine and vegetable oil processors, and potato chip manufacturers faced costs greater than the price they could charge for their products. In some cases, low market prices prevailing during the base period, and in other cases freeze prices based on last year's crop, caused fresh fruit and vegetable farmers to incur losses and to change their normal patterns of distribution of items such as tomatoes, potatoes and celery.

Objectives of Economic Stabilization Program

• To moderate the rate of inflation which has existed in the United States during the first six months of 1973 and to do so with a minimum adverse effect on supply.

• To continue expansion of U.S. economy to fulfill its potential with further increases in employment.

• To strengthen the international position of the dollar.

• To build confidence of business, industry, agriculture, the Congress, and consumers necessary

to promote an increase in capacity and supply and to reduce long run inflationary forces. To work with business, industry, agriculture, and the public to terminate controls as soon as possible in a manner which will avoid unacceptable rates of inflation after Phase IV.

Features of Phase IV

A sector-by-sector approach with controls tailored around particular economic conditions of each sector.

Phased implementation of the program between now and September 12. (Implementation calendar attached.)

• Publication of major parts of the program for public comment before their effective date of August 12, 1973 so that the constructive national dialogue begun during the consultations may be continued. In particular, proposed regulations for the industrial and service, retail and wholesale, petroleum and insurance sectors to be published on July 19.

• More flexible exceptions policy to permit relief in cases of real hardship or to permit necessary supply increases.

• Establishment of a senior committee of government officials to hear appeals and to continually assess exceptions and exemptions policy. A request that Congress expedite action on anti-inflation legislative proposals, including authority for temporary export controls, authority to reduce tariffs temporarily in selected cases, authority for disposal of excess materials from the National Stockpile, authority for construction of the Alaska Pipeline, and farm legislation to permit farmers to earn higher income through greater production rather than higher prices.

Food

"Stage A" of the regulations for food become effective immediately.

-The system of ceilings on beef prices established on March 29, will continue until September 12.

-Price ceilings on all other agricultural products have been lifted to permit passthrough of only raw agricultural product cost increases incurred since June 8th by processors, distributors and retailers on a dollarfor-dollar basis. No cost other than raw ma

terial cost increases may be passed through. Decreases in raw agricultural costs must also be passed through. This system of controls on food products except beef will continue until September 12th at which time Stage B of the food controls go into effect.

"Stage B" of the food controls program will terminate the meat ceilings and permit passthrough of other cost increases on a dollar-fordollar basis. This second stage of the food controls program will place the food sector under control rules similar to the rules for the industrial service, retail and wholesale sectors. The Tariff Commission has been asked to review temporary suspension of import quotas on nonfat dry milk. In the meantime, an immediate increase of 80 million pounds for non-fat dry milk has been ordered on an emergency basis. All remaining set aside acres are to be brought back into production in 1974. Limitations on the export of soybeans and related products will be continued through the remainder of the current crop year. An export reporting system for agricultural commodities will be continued to provide information on the volume of planned export shipments.

Industrial and service sector

• Prices in the industrial and service sector will continue to be frozen until August 12th at which time the Phase IV regulations for this sector go into effect.

• Mandatory regulations to take effect on August 12th will be issued tomorrow by the Cost of Living Council for public comment. These proposed regulations will:

-Require prenotification by all firms with an

nual sales of more than $100 million, quarterly reporting by firms with annual sales or revenues of over $50 million, and annual reporting by non-exempt firms with annual sales less than $50 million and over 60 employees.

-Establish a new base period for both prices

and costs of the last fiscal quarter before January 11, 1973. The base price has already been calculated for CLC-2 forms used in Phase III.

-Prohibit use of costs incurred prior to the new Phase IV base period as justification for price increases.

-Permit costs to be passed-through only on a dollar-for-dollar basis.

-Permit prices raised legally during Phase III to remain in effect; however, further price increases may be made only to cover cost increases incurred since the new base period. -Continue profit margin restraints in addition to other requirements to provide that profit margins may not be increased above the average for the best two out of a firm's last five fiscal years.

-Reinstate the Phase II small business exemption (60 employees or fewer).

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-Permit price increases, which are prenotified to the Cost of Living Council after August 12, to be placed into effect after thirty days if the Cost of Living Council has taken no action to suspend, deny or cut back the price increase. The thirty-day period can be extended by the Cost of Living Council if necessary to obtain additional data justifying the proposed increase. The right is reserved to re-examine price increases after they are placed into effect.

-Provide for exceptions to the new regulations only when necessary to relieve gross hardship or inequity or to provide for increased supplies and capacity.

Non-Food Wholesale and Retail Sector

• Prices remain frozen until August 12 at which time Phase IV regulations become effective. • Regulations to be issued July 19 for public comment. These regulations will require: -Preapproval by the Cost of Living Council of pricing plans based on merchandise categories for companies with sales over $50 million.

-Gross realized margin controls on these categories (sales minus cost of goods sold divided by sales).

-Continuation of profit margin limitation. Gasoline and Other Petroleum Products

• Proposed mandatory regulations controlling petroleum prices will be issued Thursday, July 19 by the Cost of Living Council for comment. These regulations, taking into account public comment, will go into effect on August 12. • The proposed regulations will provide two price ceilings: one on prices for gasoline, heating oil,

and diesel fuel; and, one on prices for domestic crude oil. Both ceilings will be reviewed and adjusted as appropriate.

• Ceiling prices and octane ratings must be posted on each gasoline pump.

• Increased crude production (new crude petroleum beyond corresponding 1972 levels) from each producing property and an equal amount of current production (old crude petroleum) will be exempt from the ceiling.

The price at which a wholesaler or retailer will be allowed to resell products (other than gasoline, heating oil and diesel fuel) is his cost of product plus his actual dollar-for-dollar markup applied to that product on January 10, 1973. • A manufacturer may not charge a price which exceeds his May 15, 1973 price without prenotification, except to reflect increased cost of imports subsequent to May 15, 1973 and to reflect increased costs of domestic crude petroleum excepted from the ceiling.

Lease agreements between a gasoline manufacturer and gasoline retailer will be held to the terms and conditions as of May, 1973.

Health

On July 19, providers of health services will be removed from the freeze, although they continue to be subject to the mandatory Phase III controls.

This action is effective retroactively to July 1, 1973 for the purpose of determining price increases under cost reimbursement contracts. • The Health Industry Advisory Committee has been directed to develop detailed recommendations to the Cost of Living Council so that revised controls for hospitals and nursing homes can become effective no later than October 1st. The objectives of the modifications in the control rules in this sector are:

-To reduce the inflationary rate of increase in the cost of hospital stay.

-To moderate the proliferation of new services and selectively control capital expenditures. -To provide economic incentives for the substitution of less expensive ambulatory care in place of in-patient hospital care where possible.

-To provide for the development of state— not Federal-administration of health care controls.

-To maximize internal flexibility and incentives for health care managers to improve productivity.

-To be responsive to cost saving innovations, such as health maintenance organizations and prospective reimbursement plans.

---The Cost of Living Council will also consider revisions in the controls for doctors, dentists and other non-institutional providers of health care.

Insurance

• Proposed mandatory regulations for the insurance industry will be published by the Cost of Living Council for public comment on July 19. These regulations will become effective, taking into account public comment, on August 12th. • Health, property-liability, and credit life insurance will be subject to mandatory controls on premium increases. Prenotification of significant rate increases by the largest insurers will be required, and smaller insurers will be required to report periodically to the Cost of Living Council.

• Formulas for calculating rate changes used in Phase II will be modified to reflect experience gained during the controls program.

• As in Phase II, state insurance commissioners will be called on to make determinations as to whether the Cost of Living Council should approved proposed rate changes. Construction

On July 19, mandatory regulations for prices in the construction industry will be issued, to become effective on August 12. These regulations will be similar to those issued near the end of Phase III.

• The regulations will establish special rules applicable to prices charged for construction operations, reaffirm profit margin limitations and provide a procedure for renegotiation of fixed price construction contracts where wages have been reduced.

• A new organizational component of the Cost of Living Council has been established to review wage and salary and benefit increases in the state and local government sector.

Enforcement and Penalties for Violation

The staff of the Cost of Living Council and the IRS is being substantially augmented to administer and enforce the new Phase IV controls. • Administrative sanctions will be imposed for violation of the price or wage standards and for failure to comply with prenotification and reporting requirements. In addition, judicially imposed civil penalties will be sought where appropriate.

Phase Out of Controls

The Labor-Management Advisory Committee of the Cost of Living Council will be requested to advise further on the orderly phase out of mandatory controls.

• The Cost of Living Council will work directly with representatives of specific economic sectors to develop plans and commitments for sufficient supply expansion to ensure reasonable prices, as part of a plan to terminate mandatory controls for those sectors.

• Rate increases by public utilities, as defined during Phase III, have been exempted from direct Phase IV controls although the Cost of Living Council reserves the right to reimpose mandatory controls on this sector if necessary to achieve the objectives of the program. Almost all public utility rates are already controlled by federal, state or local regulatory bodies. Duplication of price controls on this sector would be unnecessary to ensure that utility rate increases are non-inflationary and provide for adequate service, necessary expansion and minimum rates of return.

• Wages and prices in the lumber and plywood industry have also been exempted from Phase IV controls. Price decreases in this sector have been common in recent months, and competitive forces are expected to exert continued restraint on price levels throughout the remainder of the year.

• Long-term contracts for production coal mines have also been exempted to provide an incentive for increased supplies of coal to mitigate the energy crisis.