President Carter's proposal to offer workers a tax rebate as a "wage insurance" against rapidly rising prices represents a double departure from traditional government inflation-fighting techniques:
The plan marks the first time a government has offered workers a monetary incentive to hold wages in check. And under this plan, the government could end up increasing rather than cutting the budget deficit to combat inflation.
Althought policymakers expressed hope yesterday that inflation would fall off to the point the rabate wouldn't be needed, internal administration estimates show the scheme could cost as much as $12 billion - if prices go through the roof.
The way the plan works, the goverment in effect would make a bargain with American workers: keep your wage demands within the 7 percent wage guideline, and we'll reimburse you if need to be make sure you stay abreast.
So, if prices outstripped the 7 percent wage guideline, those workers who cooperated with the plan would be given a tax rebate to make up the difference. A 9 percent inflation rate would entitle complying workers to take 2 percent of wages off their tax bills.
Administration officials argue that the rebate plan may prove a fiscal bargain: The more workers "sign up" by agreeing to hold down their wage demands, the lower the inflation rate will be, and the less the rebate will cost.
But policymakers concede that considers only domestic inflationary pressures that stem directly from rising labor costs. It doesn't take account of other price "shocks," such as food prices or international oil prices.
As some critics have asked, suppose everyone agreed to follow the guidelines, and then the Arabs raised oil prices sharply? Inflation could top 7 percent, and the government would wind up owing billions of dollars in rebates.
Soaring farm prices, brought on by a spate of bad weather, also could push price levels up. That's what happened in 1973 and 1974 - and no one predicted that one in advance, either.
White House economic officials argue in response that such inflation "shocks" now seem unlikely, at least in the next year or so. The present oil glut will keep crude prices from taking off. And prospects are for a bumper crop.
But they insist that even if external pressures did send inflation back to double-digit levels again, the extra rebates wouldn't troublesome because the government would want to offset them with a tax cut anyway.
With inflation and economic sluggishness occurring simultaneously, tax cuts in recent years have been designed to cope with both problems. The tax cut Congress just voted was both to offset inflation and stave off recession.
If anything administration planners say, the wage-insurance rebate could serve as a kind of "automatic economic stabilizer," to offset losses in real income stemming from major inflationary shocks.
What is troubling officials now is how to structure the tax rebate plan. The scheme was added to the anti-inflation package only a few days ago, as a lost-minute sweetener for labor. There wasn't time to iron out details.
The way the plan is drafted could make a major difference - both in how much the rebate will cost and in how effective it will be in holding workers "harmless" against rapid inflation.
For example, there's the thorny question of just which workers will be eligible. The administration's white-paper late Tuesday indicated broadly the rebate would apply to any group of workers who adhered to the wage guideline.
But policymakers have yet to decide whether they also want to include workers who are exempt from the wage standard-low-wage workers, union members under existing contracts, and the self-employed.
Planners say those decisions alone could alter the estimated cost of the rebate program by as much as 30 percent. On a tab of, say, $4 billion or more, that could make a big difference.
Then there's also the question of "cap" on overall benefits. The administration said vaguely Tuesday night it probably would seek to limit the rebate to "some reasonable" amount. But it didn't specify what.
Policymakers now are considering trimming the rebate to a percentage of eac worker's Social Security wage base, rather than total wages - a move that still would cover most workers, but would leave higher-income earners unprotected.
There's also the possibility that the White House will propose a dollar limit of some sort - say, 2 percent of a worker's total wages, up to a maximum of $50 or $100. Decisions are expected to come by next january.
In addition, there was questions of whether the rebate should be treated as a tax credit or as income - which itself would be subject to taxation. Officials are leaning toward the credit approach. But it could affect costs by 30 percent.
Should government workers, whose wages are being held down by White House mandate, also be entitled to wage-insurance benefits? The answer to that could alter cost estimates another 15 percent.
While Tuesday night's announcement was the first time the rebate plan has been formally proposed by any administration, the concept isn't all that new - at least by modern-day standards.
Officials credit the idea to former Johnson administration economist Arthur M. Okun, now at the Brookins Institution. Okun first suggested it publicly at President Ford's 1974 anti-inflation "summit."
The latest version was considered briefly by Carter administration policymakers early last year, but was rejected then as too new and different. Carter revived it last week in final planning for the wage-price program.