Phase IV CLC REORGANIZATION As part of the preparation for the Freeze John Dunlop decided that the administrative organization of the Cost of Living Council should be divided into three parts during the course of the next 60 days: Freeze operations, on-going operations, and Phase IV planning. The need for an extensive operations group to run the freeze resulted in the establishment of the Special Freeze Group under the direction of James McLane, Deputy Director of the Cost of Living Council. There was also a series of on-going operations that needed to be continued, including the receipt and preliminary analysis of CLC-2 reporting forms that were just beginning to come in for the first few months of Phase III. William Walker was asked to become Acting Deputy Director in addition to his duties as General Counsel to handle the on-going operations. To implement the announcement that Phase IV would be planned with wide consultations with affected parties, it was necessary to provide a third organizational focus to develop Phase IV. John Larson, then leaving his post as principal staff assistant to Earl Butz in his role as Counsellor to the President for Natural Resources, was persuaded to accept a temporary assignment as Counsellor to the Chairman of the Cost of Living Council, to head the consultation and coordination effort for the planning of Phase IV. The third effort did not involve a separate organizational structure. Larson relied on the CLC Executive Secretariat to arrange the consultation meetings and to keep track of the Phase IV policy development process. Other parts of the usual organization structure were relied upon to develop various analyses and policy papers as their principals participated in the Phase IV special planning group, which included James McLane, William Walker, Marvin Kosters, John Larson, Don Wortman, and Henry Perritt. This merging of organizational responsibility for the consultations with the responsibility for coordinating Phase IV policy development permitted them both to proceed contemporaneously, while not risking that the policy development would outrun the input from the consultations. All of the members of the special planning group were actively involved in the consultations. This created some scheduling challenges, but it meant that at virtually any meeting of the planning group, Dunlop, McLane, Walker, Larson, Wortman, or Perritt was fresh from a consultation session and could bring to bear the ideas from that session on the deliberations of the planning group. DUNLOP'S INITIAL PHASE IV SUGGESTIONS On June 26, John Dunlop convened a meeting of this internal planning group. At that first meeting, Dunlop outlined the principal characteristics he believed to be necessary in Phase IV. First, he emphasized the necessity of handling the problems of stabilization sectorally. In times of high output, stabilization rules needed to be designed to accommodate unique economic circumstances of individual sectors: the problems of construction were not the same as petroleum, or wholesale/retail trade, or food. Second, he emphasized the need to deal with the enormous cost increases resulting from primary product price increases earlier in the year. If pass through of these cost increases could be deferred until the economy cooled later in the year, the size of the potential price thrust would be less than it would be when the economy was growing at 8 percent per annum in real terms. Thus, some device for delaying the pass-through of the cost increases or "spreading the bulge" as it came to be known-was a second requirement. Third, there was a need to be consistent with the President's stance of toughness on prices, particularly in the petroleum and food sectors. Finally, the system had to include a politically workable mechanism to become free of wage and price controls. The Phase III approach of gradual relaxation and self-administration had failed to attract the necessary public support, and Dunlop proposed that, this time, the Council follow the sectoral route of exempting industry by industry, based on their expected price behavior and supply and demand conditions in such industries. Of course, the Cost of Living Council would reserve the right to reimpose controls should price behavior become unacceptable. INTERNAL CONSIDERATION OF PROPOSALS Necessarily overlapping the consultations was internal consideration of proposals for different elements of the Phase IV program. The target for completion of all staff work was a Cost of Living Council meeting scheduled for July 12. Work proceeded separately on different pieces of the Phase IV program; manufacturing, construction and service; insurance and finance; food; petroleum; regulated industries; and health. A timetable was developed calling for review of these different pieces by the planning group and the Special Freeze Group at different points through the following two-week period. Despite an initial commitment to involve representatives from other agencies through the forum of the Freeze Policy Group,10 most of the substantive program development occurred internally among the Council staff, with the Freeze Policy Group used as a sounding board for the internally developed proposals. Dunlop, Shultz, Prior to White House Meeting On the evening of Friday, July 6, John Dunlop met for approximately an hour with the special planning group to review a comprehensive outline of the proposed program for the food and manufacturing sectors, in preparation for a subsequent meeting with George Shultz on that same evening to be followed by a presentation at the White House on Saturday, July 7th. The package which was reviewed that evening included separate price outlook summaries for food and industrial prices and two to three page outlines of the proposed approach for controls in those two sectors. STAFF WORK PRIOR TO WHITE HOUSE MEETING Between June 26 and July 6, substantive planning had proceeded on several different tracks. Don Wortman lead the development of a controls scheme for general manufacturing and service prices, Hazen Gale (Deputy Director of the Council Food Staff) and Dawson Ahalt (Deputy Director of the Office of Economic Policy) directed development of a program for food prices (with the frequent involvement of Kenneth Fedor (Director of the Food Staff) and members of the Food Industry Advisory Committee) and Charles Owens (Special Consultant to the Director) continued efforts which had begun early in June to develop a program to control petroleum prices. Retail and wholesale regulations were the responsibility of William Walker (General Counsel), along with members of Wortman's staff. Manufacturing and Service Phase II formed the basis for the manufacturing and service policy. There was some feeling within the special planning group that an entirely different approach should be considered, perhaps based on individual product ceilings, but the time pressure, combined with the relative familiarity of the Phase II machinery, made Phase II the natural starting point. Changes to the Phase II approach focused on three tightening steps: changing to the prenotification requirement, changing the base period, and elimination of the TLP concept. After some discussion about lengthening the prenotification period to 60 days, it was decided to retain a thirty day period, expecting that this would require significant cost absorption by prenotifiers without imposing unbearable strains. In Phase II, costs incurred since January 1, 1971 could, in some cases, be used to justify price increases. Firms were permitted to prenotify price increases based on these costs and defer full implementation of the price increase approved. Moving the base period for prices and costs to the last quarter of 1972 was expected to eliminate much of the "float" which existed under Phase II since cost justification would have to be based on cost increases incurred since the last quarter of 1972 and previously unused price authority were cancelled. Many basic industries, particularly non-ferrous metals had incurred substantial cost increases since May, 1970 but had been unable to raise prices significantly until 1973 because of market pressures. The changes of the base period effectively eliminated these accumulated cost increases (float) as justification for price increases during 1973. Further, though Phase III price increases were to be left undisturbed, prices could not be increased further until sufficient cost increases had been incurred to justify both the Phase III increases and any intended Phase IV increases. There was considerable controversy within the special planning group about the elimination of the TLP concept. Arguments in favor included the reduction in administrative prenotification load and the additional flexibility which TLP afforded for necessary price adjustments. Opposing arguments rested on the premise that too much flexibility was provided for large price increases in essentially unpredictable areas, because of differing product mixes by large diversified firms. By the time of the July 6 meeting, two fundamentally different approaches had emerged-one based on the TLP concept and the other based on a narrower product-line prenotification. The tighter approach was presented to Shultz and accepted. He then asked the group to make the same presentation at the White House the next day. Food Food presented a much more difficult problem than could be met with selective tinkering with the Phase II regulations. It was recognized that food price increases had been largely responsible for the demise of Phase III, and the President, in announcing the second freeze, had pledged that food prices would receive special attention in Phase IV. On the other hand, experience during the first two weeks of the Freeze had made it clear that restraint on fruit and vegetable prices at the retail level was already beginning to disrupt supplies, as retailers and other middlemen were refusing to pay prices desired by farmers. An attempt to develop a program which was responsive to these conflicting forces began by examining the outlook for each major category of food product. It was clear that fruits and vegetables probably could not be subjected to stringent controls after the Freeze without severe supply disruptions, but that the freeze on meat prices might be safely continued, particularly if export controls, already in place for soybeans and soybean products, were extended to corn and other feedgrains. The idea of a two-stage program for food initially emerged from the Food Industry Advisory Committee, which recommended immediate shift to a 60-day "stage A," which would permit pass through of cost increases for raw agricultural products, with a second sixmonth stage where cost-justification would be broadened to include all cost increases. The rate of price increase in the first stage would be mitigated by a system of export controls. Meat was to be included in stage A. The package which went to Shultz and the Quadriad on July 6 and 7 struck a middle-ground. Ceilings were to be continued on beef, pork, lamb, poultry, and possibly eggs, export controls were to be extended to corn and other feedgrains, import restrictions were to be lifted, and fruits and vegetables were to be moved into the Food Advisory Committee's "stage A." When the Freeze was lifted for the rest of the economy in mid-August, Food would become subject to the basic cost pass-through and prenotification requirements. WHITE HOUSE MEETING The group that convened at 9 A.M. in the Roosevelt Room in the west wing of the White House, on July 7, was, in effect, an enlarged Quadriad. The meeting was chaired by General Bennett, Alexander Haig's deputy, and included Melvin Laird, George Shultz, Peter Flanigan, Herbert Stein, Roy Ash, John Dunlop, Bryce Harlow and a small contingent from the Cost of Living Council's staff-basically the special planning group. Dunlop led the group through the Friday evening package after which there was an exchange of questions and some discussion. After approximately two hours, Shultz dismissed the CLC staff group and the meeting continued. STAFF WORK ON WHITE HOUSE PLAN The CLC staff proceeded to implement the plan set forth in the White House meeting. The implementation plan called for a staged |