Carter White House to Reagan: wages will be key inflation problem

"Don't throw away those files," advised Alonzo L. McDonald, staff director of the Carter White House, "you may need them in about two years' time." He was speaking to members of President- elect Ronald Reagan's White House transition team. And he was speaking about an agency that the Reagan administration plans to abolish.

The agency in question was the Council on Wage and Price Stability (COWPS), set up by President Carter to establish and monitor wage and price guidelines for the US economy.

Mr. Reagan says he wants no part of government intervention in the wage negotiations process. So COWPS -- most recently header by Carter's chief inflation fighter, Alfred E. Kahn -- is grinding to a halt.

But wait a bit, says Mr. McDonald. The files of COWPS "are the only place in town with a full record of what wages and prices have been doing over the past few years."

In about two years, he is convinced, Reagan and his aides will decide -- however reluctantly -- that something has to be done about spiraling wages costs , if inflation is to be controlled.

So far this year wages throughout the economy have leaped up at nearly a 10 percent pace, without counting cost-of- living adjustments clauses built into many union contracts.

Economists in and out of government agree that this massive upward push on the labor cost of producing goods and services is a major, perhaps the most significant, contributor to the nation's underlying inflation rate. This rate, 7 percent only a couple of years ago, now hovers close to the 10 percent mark and is far harder to bring down than the more widely watched consumer price index (CPI).

What happens, According to expers, is that the rising cost of "volatiles" -- fuel, food, housing -- tends to get built into wage gains obtained by workers, union and nonunion alike.

Because the prices of these volatiles may decline, but wages do not, the underlying inflation rate in the United States at times can be higher than the CPI.

Critics contend that the guidelines set by COWPS were more honored in the breach than the observance, so why not scrap the agency?

White House officials, conceding that the guidelines were less than effective , nonetheless argue that inflation would have been a bit higher without them.

However thay mabye be, the focus shifts now to the future. McDonald, among others, discerns a yawning gap in Reagan's strategy for fight inflation.

That gap is lack of an "incomes" policy -- some mechanism to get a handle on rising wage costs when those costs, passed along to consumers in the form of higher prices, exceed productivity gains.

If workers get more pay but fail to produce more goods or services, inflation results.

Reagan, so far as is known, will depend primarily on a combination of tax cuts and stringent slashing of the federal budget to fight inflation.

Said a governor of the Federal Reserve Board: "No way is he going to be able to cut that budget enough to offset the inflationary effect on his tax cuts."

Soaring interest rates alone are adding billions of dollars to the US Treasury's cost of financing budget deficits by borrowing money.

The task of trimming the fiscal 1981 and subsequent budgets, in other words, becomes harder than even unless Reagan cuts deeply into a wide variety of nondefense programs.

If this member of the Fed is correct, and many experts agree with him, the Reagan administration may find those COWPS dossiers very useful at some point down the road.