The Second Freeze IMPETUS FOR CHANGE Approximately 90 percent of the rise in the Wholesale Price Index during the first five months of 1973 was concentrated in four areas -food, petroleum products, textiles and lumber-where, because of international competition and demand, price controls were ineffective. The press, though, blamed the rate of price increase on the "softness' of Phase III, i.e., the willingness of those in charge to exercise strong sanctions. Throughout the Spring, pressure on the Administration to do something to halt rising prices intensified. The press blamed the accelerating inflation on the move from Phase II-with its stringent controlsto Phase III, with its more flexible controls. During this time the Economic Stabilization Act, the legal basis of the Program, was due to expire and a proposed extension was before Congress. The Congress, with considerable credibility, threatened to mandate a tightening of controls legislatively both as it was considering the extension of the Act and after a simple extension of the Act was passed and signed at the eleventh hour. (See Congress and Controls.) The "do something" pressure resulted in three different occasions through the Spring in which major changes in stablization policy were implemented. The first change was the imposition of ceilings on the prices of red meat on March 29th. The second centered around the reinstitution of prenotification requirements on May 2nd. The third, and most dramatic event was the Second Freeze imposed on June 13th. MEAT CEILING As public dismay mounted over food price increases, the Council staff mounted a major effort to explain to the public the supply actions which had been taken to moderate price rises. On March 20, a white paper was released which summarized the nature of the problem, reviewed actions which the Administration had taken to increase supplies, and predicted that the rate of increase for food prices would subside by the end of the year. The effort was poorly received; the press gave major play not to the substance of the white paper, but to an offhand remark made by Deputy Director McLane during the press conference at which the white paper was released. Perhaps, he said, the public should think about "eating less," as he himself had begun to do. Even before the white paper was prepared, the Council had also begun to consider on a contingency basis, some sort of freeze on meat prices. There was growing concern that an Administration failure to act dramatically could set off a wage explosion which would provide continued inflationary pressures even after beef prices subsided later in that year. Also, the Congressional mood was growing uglier, and a tough action, it was thought, might improve the overall reaction to Phase III and enhance the possibility for getting a simple extension of the Economic Stabilization Act. Donald Perkins, Chairman of the Food Industry Advisory Committee, had broached the possibility of a ceiling on meat prices at the February 20 meeting of the Committee. The reaction was hostile. Still, the staff continued to review the possibility. There was considerable concern among the staff that imposition of a freeze would cause shortages, that would worsen, rather than improve, public attitudes toward the Program. Moreover, the public might interpret a freeze as "freezing prices at high levels." But the pressure for some form of dramatic action was growing, particularly since it was clear that no conceivable supply action could have any impact on prices until the end of the year at the earliest. Increasing the pressure was the seasonal trend for beef and pork prices, which typically increase sharply from April through mid-Summer and then decline through the Fall. On March 29, the President announced a ceiling, of indefinite duration, on prices for red meats. The Congress was not impressed; it wanted more. On April 4, the House Banking and Currency Committee voted to roll back all prices and interest rates to their January 10, 1973 levels. REINSTITUTION OF PRENOTIFICATION By mid-April, the Council staff had begun to look at a variety of contingencies to tighten Phase III. Initially, pre-emptive measures such as announcement of a freeze or return to Phase II were considered, but as the outlook for a more flexible extension of the Act improved, the emphasis shifted toward less Draconian moves. Don Wortman, Administrator of the Office of Price Monitoring, had prepared a six month scenario, beginning with a 30-day freeze, followed by a modified return to Phase II, and progressive relaxation of mandatory controls until the end of 1973 at which time decontrol would have been completed. Less stringent options included reinstitution of the prenotification requirement for large firms and selective tightening of the Phase III price standards for other firms. There was vigorous internal discussion over whether some action short of reimposing a freeze should be taken by the President when he signed the Economic Stabilization Act extension. It was clear that public hostility to Phase III had not abated; there would be more pressure for a tougher program. In addition, there was growing concern about the continued run up in prices, which by now had spread to a wide range of raw materials. It appeared prudent to couple the extension of the Act with some dramatic moves to demonstrate the Administration's commitment to use the legislative authority in whatever ways were most appropriate to deal with changing economic reality. Thus, on May 2, the President announced re-imposition of the 30-day prenotification requirement for those firms with annual sales in excess of $250 milion, which had increased prices more than 1.5 percent and extension of the quarterly reporting requirements to firms with annual sales between $50 million and $250 million. The Council intended to challenge prenotified price increases which were not cost justified, which were not adequately justified as necessary to provide for resource allocation or maintenance of supply (the basic Phase III self-administered exception criteria) or which would cause the firm to exceed its profit margin limitation. SECOND FREEZE The falling stock market, the quivering dollar and fears of shortages of gasoline and other products resulted in continued public dissatisfaction with economic matters. On May 31st, George Shultz convened a meeting which included John Connally, William Simon, Arthur Burns, Roy Ash, Peter Flanigan, Kenneth Cole, Edgar Fiedler, Herbert Stein and John Dunlop. The group reappraised the general economic situation and the Troika1 forecast, and discussed the general view of the economy presented by the Council of Economic Advisers. The discussions included fiscal and monetary policy as well as the question of controls. There was a strong push for certain fiscal measures, including making the investment tax credit variable' from its present level of seven percent to a range of 3 to 15 percent. Other proposals included the placing of some profits into reserves to be released at a later date when the economy was cooler, government intervention to force increased personal savings, and increased taxes particularly on gasoline and/or automobile horsepower. But it was thought that Representative Wilbur Mills would unequivocally oppose any program for making the investment tax credit variable. Further complicating fiscal efforts was the Ways and Means Committee concern with important trade legislation-legislation that might delay action on tax measures by as much as six months, when the economic environment might make such measures entirely inappropriate. Thus, whatever the academic merits of changes of fiscal policy, they were not very practical. There was also the consideration that any increase in tax revenue would not be used as fiscal restraint but as an opportunity for further and larger expenditures. This would result in a larger government, which was contrary to the basic stance of the administration. The other thrust of these late May meetings centered on tightening the wage-price controls program in publicly visible ways. The Cost of Living Council staff put together a nine-point package of actions which could be taken to tighten Phase III. The Council's plan included the following: 1. Suspension of the announced five percent steel price increase, pending public hearings by the Cost of Living Council. 2. Full-scale investigation, possibly including public hearings, of companies reporting substantial increases in profits since January of 1973. 3. Careful review of all prenotified price increases over 1.5 percent. 4. Investigation of a sample of record keeping companies with sales between $50 and $250 million. 5. Imposition of a requirement that all companies raising prices more than three percent justify the increase publicly. 6. Limitation of the cost justification formula to permit passthrough of only 75 percent of incurred cost increases. 7. Public hearings on executive compensation with the purpose of tightening the rules. 8. Summoning lead and zinc companies to review recent price increases, coupled with an order to the GSA to dispose of all zinc stockpiles available for administrative disposal in FY 1974. 9. Lowering the prenotification threshold to $100 million. In addition it was proposed that the President might announce a ceiling on prices for domestic crude petroleum. In accordance with general practice, these proposals were summarized in a memorandum to the President and a draft Presidential statement was prepared. Several meetings ensued in which George Shultz, Herb Stein, Roy Ash, John Connally, John Dunlop, and (usually) Alexander Haig discussed the proposals with the President. The group was unanimous in its support of the nine-point proposal. However, the program was not acceptable to the President; he did not believe it to be sufficiently dramatic or capable of attracting enough public attention to have the appropriate psychological impact. In these meetings it was his style to ask each participant questions -to probe very sharply-about the various point and details which had been worked out previously among the group. The focus in these meetings was modification of the wage-price control program, since the President agreed with George Shultz that fiscal changes were not very practical. At one time, though, he did express some interest in the idea of temporarily withholding profits. After several meetings, the President advised the participants, through Haig and Shultz, that perhaps a stronger kind of program was appropriate. The group was instructed to design the toughest kind of program it could think of. Another set of papers was developed for an extended freeze across wages and prices. This was summarized in a memorandum to the President and another draft speech announcing it. On Saturday morning, June 9, the group met at the Department of the Treasury to prepare the package for the President, who was in Key Biscayne. Both the more moderate program and the tougher program were laid out in a briefing book that also included separate pieces of paper expressing the individual ideas of each member of the group. John Dunlop strongly urged the convening of the Labor Management Advisory Committee before any decision was finalized and announced. The entire package was forwarded to Melvin Laird, who had indicated his decision to join the White House staff but then was in Europe. His views were cabled to the President in Florida sometime on Saturday. On Sunday morning, June 10, George Shultz received a call from General Haig indicating that the President had decided on a program somewhere in between the options presented in the package. He wanted a 60-day freeze and had ruled out changes in fiscal policy. Documents necessary to implement this decision were to be prepared. He was willing to meet in advance with the Labor/Management Advisory Committee, which was then summoned by telephone to meet on Monday, June 11. That group supported in rather general terms the proposition that something ought to be done, but most of the labor representatives opposed the Freeze as did more than half of the management representatives. After the meeting, the President indicated that he still wished to proceed with a 60-day freeze. Key members of the Cost of Living Council staff were then informed so that they could begin preparing the necessary documentation. As preparations proceeded, the Congressional leadership indicated to the President their belief that the Freeze was the kind of dramatic action necessary to bolster the stock market and help the dollar in international markets. |