President Carter called on major companies and labor unions yesterday to discuss their wage and price plans in advance with his administration, as part of an effort to whittle half a percentage point off the "underlying" rate of inflation this year, and the same amount off wage increases.
But the President's plan promptly ran into heavy opposition from AFL-CIO President George Meany, who labeled it "a step down the road to controls" even though it would be entirely voluntary.
The administration had predicted grudging acceptance for the plan from both business and labor. But AFL-CIO spokesmen said that as outlined by Carter, the anti-inflation program was stronger than had been described to the labor federation in advance.
Meany was said to consider the administration plan the equivalent of "pre-notification" - something to which he had always vigorously objected. A formal statement said that the AFL-CIO would be willing to meet for talks about problems of "mutual concern," but would not support "the proposition that government should define the terms and results of collective bargaining through any variations of guidelines, generalized or industry by industry."
Organized labor felt burned by President Nixon's wage and price controls in the early 1970s.
Meany contends that wages have not been the source of inflation in recent years, and that in fact, wage increases have been decelerating without a push from the federal government. He added bitterly that Carter's economic message to Congress yesterday ignored the impact of high interest rates.
Adminstration officials said that the underlying inflation rate that they want to trim by half a point this year (and by similar amounts in later years) has averaged 6 per cent in the past two years. Over the same period, the increase in hourly earnings has averaged 7.3 per cent.
Thus, in broad terms, the Carter administration's inflation goal for 1978 is about 5.5 per cent, and the wage target is about 6.8 per cent.
Meanwhile, the President's detailed economic message and elaboration by Economic Council Chairman Charles L. Schultze also made more explicit two important development referred to in general terms in the State of the Union message:
The net economic stimulus of the administration's tax and spending programs between fiscal 1977 and fiscal 1979 will be only $4.7 billion, despite Carter's proposal of a $25 billion income tax cut. The tax cut's effects will be offset by other factors.
The goal of a balanced budget in fiscal 1981 has been put aside, in favor of a policy calling for a balance only when "the developing strength in the economy allows." The clear implication of a long official explanation of the pros and cons of budget balancing is that the economy is not likely to be strong enough in 1981 to operate without a federal budget deficit.
The President revealed that his tax cut proposal of $25 billion is the next result of $34 billion in reductions, offset by tax revisions raising $9 billion in new revenue. A total of $7 billion in the changes will affect individuals, presumably in higher tax brackets.
The $2 billion in business tax revisions, Carter indicated, are concentrated in tighter rules for deduction of business entertainment expenses, and in the treatment of income derived in operations abroad.
Carter said his tax proposals would result in a budget deficit for fiscal 1979 only slightly smaller than the $62 billion figure now estimated for fiscal 1978. Earlier, authoritative sources said that the spending total for the fiscal 1979 budget, which goes to Congress on Monday, would be around the $500 billion mark.
Carter said not only that tax reduction this year "is essential" to keeping the economy moving ahead, but that "two major drains on the economy" would likely require additional tax reductions in subsequent years - and those, in turn could mean his goal of a balanced budget "would have to be deferred."
The major drains referred to are an estimated $30 billion state-local surplus which "absorbs the incomes of consumers and business, and so act as a drag on the economy," and the deficit in U.S. international accounts, which amounted to $18 billion last year. This deficit, Carter said, "has the same general effect on economic activity as a multibillion-dollar increase in taxes."
The administration's decision to venture, however timidly, into the touchy ground of voluntary wage and price management was based on the President's conclusion that the inflation process "has developed strong momentum."
Unless the trend is reversed, Carter said, "the prospects for regaining a fully employed economy will be seriously reduced."
After long discussions with business and labor representatives, the President and his aides concluded that a uniform set of numerical standards - such as the Kennedy-Johnson guideposts of the early 1960s - would not only introduce distortions but also be fought tooth and nail by companies and union leaders.
A day before Meany's blast, Schultze had said that the combined business-labor reaction "varied between wary acceptance and a little bit of grumbling."
The administration believed a simple standard calling for deceleration below the average inflationary trends of the past two years, varying the requested amount of moderation on a case-by-case basis, would find general acceptance in the private sector.
"The most important thing is to get the momentum turned around and to get (inflation) going down," Schultze told a press conference.
"Obviously, with what has happened, we can't bring inflation to a screeching halt overnight . . . But if you could get, for example, something like a half a per cent downward momentum in the underlying rate of inflation, we would consider that to be progress. If you can do better that that, great. But we would consider that to be great progress."
The program would be managed by the existing Council on Wage and Price Stability, but with the direct involvement of Schultze and members of the President's Cabinet.
Schultze said the administration would give priority attention to industries where there is "discretionary" pricing power, rather than those in highly competitive situations - and to those products or materials which have a broad effect on the entire economy.
Both Carter and Schultze stressed that they did not expect the same rate of deceleration for all wages and prices, and that in exceptional cases, a slowdown in the rate of inflation may not be possible.
A number of private economists and analysts said yesterday that the real test of the Carter program will be his willingness to speak out if someone violates the deceleration standards in a flagrant way.
Schultze attempted to parry all questions on how the administration would publicize its inflation-control efforts, saying at first only that "we intend to asset the public interest." But when pressed to say how the American public "could tell the good guys from the bad guys," the economic adviser declared:
"From time to time, we will say something if there are egregious examples" of ignoring the deceleration standard. He added that occasionally, good examples would also be cited, without suggesting that they need be taken as precedent.
The estimate that the fiscal thrust of the Carter program would be only $4.7 billion was volunteered by Schultze, as a clarification of remarks he had made earlier at the press conference.
This amount, Schultze told The Washington Post, represents the increase in the deficit in the "full employment budget" - a concept economists use to measure the effect of the budget on the economy - between fiscal 1977 and 1979. It arises as much out of expanded spending programs as from the stimulative effect of tax reductions.
Schultze conceded that there had been some shortfalls in administration goals. Specifically, the 4 per cent inflation target by the end of 1979 is abandoned. And the 4.5 to 5 per cent annual real growth goal now set out for the next few years is "slightly shaded" below the 5-plus per cent figure Schultze himself had said was urgent in mid-1976.
The unemployment target for the final quarter of this year is now 6.2 per cent, dropping to about 5.8 per cent toward the end of 1979.