It was Oct. 25, 1978, the day after President Carter announced his new, voluntary program to cut the rate of inflation and begged the nation not to ridicule the plan.
Wall Street was ridiculing it. Stock prices slumped as investors said, in effect, that wage and price guidelines would do nothing to slow the rate of inflation. The dollar was tumbling on foreign currency markets for the same reason.
But Andrew Purser, chief executive officer of a large industrial company, was not laughing. He was worried.
President Carter had asked companies and workers to hold wage and fringe benefit increases to 7 percent a year on all contracts signed after Oct. 24. He promised to monitor all companies with sales in excess of $500 million.
Purser's company, which spoke freely with The Washington Post on the condition that neither it nor its officers be identified by their real names, is among the 400 or so companies that will be watched carefully by the Council on Wage and Price Stability.
Several days before the president's address, Purser's company had made an offer to one of its key unions, an offer that would violate the president's wage standard. The union was scheduled to vote on the offer the following Sunday.
Although the company had no large government contracts that could be cancelled by government anti-inflation fighters, it still wanted to comply with the voluntary program, Purser said. No company likes to feel the sting of presidential criticism.
"It was a tough problem. I got in the office and asked (the company's general counsel) to find out what to do. We really didn't know what to do. If we pulled the good-faith offer, clearly we would have had a strike," Purser said.
"But there was no doubt the contract was significantly above the guidelines. It was probably about 12 percent for the first year. But our wages were already below the prevailing rate.We just weren't going to get the labor force if we weren't willing to pay for it."
The general counsel immediately got in touch with the law firm the company had used during the Nixon administration's wage and price control program from 1971 to 1974.
Their response: "We don't know what the hell you're supposed to do."
The law firm got in touch with the Council on Wage and Price Stability, which administers the anti-inflation effort, and was told the administration planned to have a ruling on problems similar to the company's by Friday. But by Friday, the council was saying "next week."
"We couldn't wait that long. We had a vote in two days," said Tucker. "So we went into our files, pulled out our old Phase II rules and figured our offer would have been in compliance under the old 'tandem' rule."
That rule said if the wages of one group of workers are tied historically to those of another set of workers who signed a pact before the program took effect, a company offering and a union accepting a similar-sized package would be in compliance with the program.
So the company kept the offer on the table, and the union voted to accept it.
As it turned out, the offer was in compliance with the voluntary standard under "rules" the council put out several days after the vote. It qualified both as a tandem exception and as a special exception. The rule for the latter says a management offer on the table before Oct. 24 could be accepted by the union, even if that proposed contract offered wages and fringes in excess of the 7 percent guideline.
Purser's company was among the first to face difficulties understanding and complying with the president's new set of wage and price standards. But it has not been the last. Nor, for that matter, was it been the last time the company has been perplexed by the supposedly simple set of standards (designed, the president's advisers say, to be self-enforcing like the tax laws).
From deciding how to comply with the price standard to maintaining fringe benefits workers and executives already have earned, the rules present companies with complications that inflation fighters probably have not foreseen.
"And when companies come down to Washington to present legitimate cases for exceptions from this or that rule, and when Washington grants those exceptions, look out. For each exception you grant one company, you present problems for 10 other firms that buy from that company." Purser warned.
The president wants companies to hold their prices a half percentage point below their average increases in 1976 and 1977. But if a company faces substantial, uncontrollable cost increases (such as from ongoing labor contracts or imported goods that are used in production), it can raise prices by more than the general standard si long as it does not increase its profit margin (profits as a percent of sales).
The administration also is considering toughening up the profit-margin standard to make it less attractive for companies to adopt it rather than the price deceleration test.
According to Purser and his chief financial officer, figuring out how to comply with the president's price standard will be the least of the company's worries. Adhering to them will be quite a different question.
So far, the company has had only minor price increases since the Oct. 24 announcement so it has not had to face tough questions. But it will soon as costs continue to escalate, Purser said.
The company is a major eastern industrial concern with many ongoing labor contracts; it uses a large number of imported products as raw materials. "We'll probably have to violate the general price standard" because of cost problems, especially if the company chooses to comply with the president's program on a division-by-division basis rather than as an overall company, Purser said.
The company has seven divisions that operate autonomously. Six of them are manufacturing divisions; the seventh is a retail operation. The company can choose to have each division comply with the standard, or have the company as a whole comply.
Each approach is fraught with complications and risks.
Suppose, the chief financial officer said, the company goes division-by-division. It would almost be sure to have to violate the deceleration standard in several of the divisions and hew to the profit-margin alternative instead.
"But in the base years for the profit margin test (the best two of the last three), we had very bad margins," said chief executive Purser.
Under the current rules, the company cannot adjust its product mix to try to hold its overall price increases to the deceleration standard and avoid the profit-margin constraint.
Under the rules adopted by the Council on Wage and Price Stability, if a product accounts for 30 percent of a company's sales in the base period (the company in question makes thousands of products), then any price increase in that product or product line must have the same overall weight in the impact of price increases on the overall compliance of the company.
So if the costs of producing that product were rising quickly (because of the rising price of imported materials), the company could not reduce the product's importance to 15 percent of the firm's sales to hold down the weighted average of its overall price increases.
"We either have to stop making the product altogether, or it counts as 30 percent of our sales for the compliance year in question" even if the company cut back production of the product or product line, Purser said.
Purser said it is not realistic to consider ceasing the manufacture of any of its products because many of those that face the biggest cost increases are critical, irreplacable materials to the industry that Purser's company supplies.
"We want to cooperate. We have a social responsibility to comply," Purser said. But he noted that even if the company complies with the president's standards and raises prices to cover cost increases while holding profit margins constant, the company could face difficulties with its employe relations.
"We're concerned about the employer-employe relationship. We attempt to comply, but end up raising some prices substantially because of cost increases. Many of our employes wouldn't understand that it's out of necessity. They'd look at the freeze on their wages and say, 'The company is taking it out of our hide.' The customer relationship here is less troublesome. They would understand," the general counsel said.
The firm could decide to comply on a companywide basis (and probably will). In that situation, one division whose cost increases are not as severe would in effect subsidize another division whose costs are skyrocketing.
"We give all our division heads great autonomy and set goals for each division. We'll have to change them all," Purser noted.
Furthermore, Purser noted, the company will have to take some chances on which division will get what price increases. Suppose the company saves all its ability to raise prices for Division A, while competitors have chosen to take a loss on the products that compete with Division A, he said. The reverse situation could be true in product line B, where Purser's company held prices down but costs for competitors were increasing.
If a competitor is not as diversified as Purser's company (say it only makes product B), the competing company could face financial difficulties.
All of the pricing problems are hypothetical now, Purser admits, although they were real enough during the wage-price controls of 1971-74.
But wage and salary problems are not hypothetical. The company is confused, like most, about how to account for fringe benefits.
The company is also up in the air about executive benefits. "We gave some executives stock options five years ago that they may choose to exercise today. Under the current rules, as we interpret them, they count against this year's pay standard," the comptroller said.
In other situations, executive bonuses were set early in the year, before the program began, for performances for all of 1979. But if the bonus is paid after Oct. 24, it counts against the 7 percent standard for all management personnel.
Not only executives are hit by fringe benefit complications. Pensions affect all workers. "Assume there is no increase in pension benefits, but actuaries decide we must increase our contribution to the pension plan because they have changed their assumptions about payouts and decide the funds do not have enough money in them after all. Or even because of the decline in the stock market," said the comptroller. "That increase in pension payouts counts against the 7 percent.
The administration, trying to run a simple program, will discover that it cannot, Purser said, recalling Phase II of wage and price controls. "They'll discover a parade of legitimate exceptions. And they'll have to bend the rules to recognize the realities of the marketplace. Or products will disappear and workers and executives will skip around from employer to employer to get wage and salary increases they could not get from their current employer."
But when the administration starts bending the rules, the rules and regulations proliferate.
Already the Phase II legal establishment in Washington is beginning to emerge. One public relations firm has started a new, expensive weekly report on the president's program. And firms and labor unions are devoting top talent to understanding the program.
Time, Purser said, that could better be spent on other things.