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The immediate post-freeze period is already known around the White House as "Phase 2." It is of vital importance. For if controls are suddenly lifted, without any transitional mechanism or any ongoing wage-price review board to hold increases firmly within acceptable limits, there would be no point to the freeze in the first place. All the gains would evaporate at once; prices would rise sharply to make up for the hold-down, and wages would jump to keep pace. The federal official charged with special responsibility for Phase 2 is Herbert Stein of the Council of Economic Advisers, an outspoken economist who was a vigorous opponent of wage-price regulation only a few months ago.
Elusive Mood
When the freeze expires in mid-November, how will anyone know whether or not it has been a success? Phase 2 will be the real test, but at the end of the first 90 days there will be several useful points at which to apply the economic litmus. Part of the test will be psychological: there will have to be a popular consensus that the program is working, some feeling that things look better. Even before then, there will have to have been serious negotiations between labor, management and Government to get Phase 2 under way. If Phase 1 has been a success, wages, of course, will be steady; so should the cost of living, particularly since automobile prices will remain level or even decrease. If there is a resurgence in consumer confidence, the high rate of savings should have come down and retail sales should have picked up well before the freeze expires. If labor costs are stable, as they should be, even a modest increase in productivity will mean higher profits for manufacturers. That, in turn, means a net gain in real income across the U.S. For whom? If prices are frozen beyond the end of Phase 1 and wages are allowed to rise moderately—say, by 4%—that would distribute the net gain fairly widely. At best, there will be a good start toward building a new international monetary structure, and the U.S. will avoid touching off a protectionist trade war.
Administration experts have already started speculating about the shape of Phase 2. There will be neither a return to the pre-freeze status quo nor permanent imposition of a thoroughgoing control system. Instead, the President is likely to pick one or more intermediate devices within the first 60 days of the freeze period, thus leaving the final 30 days for setting up whatever administrative machinery is required. He will probably make use of wage-price review boards for various industries, selective controls for others, economic sanctions through withholding or awarding Government buying contracts, and just plain jawboning. Quite possibly the freeze could be extended for a time beyond the end of the 90-day period, then lifted industry by industry as continuing arrangements are worked out.