Incomes Policy Legislation, 1975

The conceptual fallacy here is in separating prices and labor cost. From the standpoint of a manufacturing industry, they cannot be separated. They must be treated alike. And in our experience, the national interest is best served when both prices and labor costs are established in the free marketplace.

H.R. 4214 also establishes three categories of firms depending in large part on "degree of concentration." In our opinion, this represents an attempt at selective price controls and would result in inequities and distortions even worse than those suffered during the recent period of total control.

We have also been asked to comment on H.R. 4594. This legislation could require detailed, comprehensive recordkeeping-a whole new accounting system-by arbitrarily defined product lines.

How to create this new, different, and separate system of accounting which, incidentally, would not be of any value to management in running the business, still eludes the best accounting heads in the Nation. I would like to quote an excerpt from the congressional testimony of Robert K. Mautz, a certified public accountant and a partner in the firm of Ernst & Ernst. Quote:

One important reason (that line-of-business report is impracticable) is that no generally accepted accounting principles have yet been established to provide guidance and to assure some degree of uniformity, and therefore, of reliability, and comparability, in the preparation and presentation of line of business reports.

Section 3 of H.R. 4594 provides that this line of business information can be made available to the public at the discretion of the Council on Wage and Price Stability. The Council would make the determination as to whether or not this information "would impose undue competitive disadvantage." We feel very strongly that this is inadequate protection against the release of confidential competitive data.

In addition, it would create two giant, nonproductive bureaucracies: one in the private sector to develop the endless reams of material, and one in the public sector to analyze and act on this mountain of data.

Our reaction to these aspects of the bill is that we had prenotification and delays under wage and price controls. And they were completely ineffective in holding down inflation.

We believe that price changes must be implemented when market conditions require them, and wage changes must be made in accord with contract provisions, freely negotiated.

Sections 3 and 6 of H.R. 4594 provide subpena power at the Council's discretion. It is our opinion such power is unwarranted and would be counterproductive to the competitive processes on which our economy is based.

Let me explain. If an individual company's cost and profit information is subpenaed, there will be pressure to make it public. And if a particular company's costs are known, its competitive posture is severely impaired. This could lead to serious dislocations in the marketplace with, in many instances, loss of jobs.

Title 1 of S. 409, which was passed by the Senate on May 6, includes basically the same recordkeeping requirements and subpena power

provisions as H.R. 4594. Our comments on these onerous features apply equally to both pieces of legislation.

The subcommittee has also asked us to comment on H.R. 5142. This legislation calls for the complete and immediate abolition of the Council on Wage and Price Stability. The American Paper Institute does not think that such drastic action is necessary.

This presentation has been rather negative, so far, and the subcommittee may be wondering quite justifiably what we support. The American Paper Institute supports unequivocally H.R. 6577. This bill, in essence, calls for the continuation of the Council on Wage and Price Stability, as presently constituted, through September of 1977.

We have spoken in opposition to much of the proposed wage and price stabilization legislation before the Congress because we consider it negative, if not downright punitive, from the standpoint of growth in the U.S. standard of living, improving productivity curing our economic ills, creating jobs and improving the Nation's balance of pay

ments.

We believe that the Council as presently organized is doing, and can continue to do, an efficient job of analyzing and reacting to inflationary pressures as they develop in the United States and worldwide.

I would like to quote item (6) under section 3 (a) of the Wage and Price Stability Act.

The Council shall monitor the economy as a whole by acquiring as appropriate, reports on wages, costs, productivity, prices, sales, profits, imports and exports.

We are aware that there may be occasions which require the Council to study the buildup of pressures which could involve wages and prices. It is our belief that both industry and labor wish to cooperate with the Council to identify basic forces which might contribute to inflation. Therefore, in conclusion, we believe that the best deterrents to inflation are increased productivity and an adequate supply of product. These goals are best achieved in a free market in which prices-and wages are established by laws of supply and demand. Just talking about controls is, itself, inflationary. We must give the free marketplace a chance to work.

From the standpoint of the U.S. economy, the Council on Wage and Price stability in its present form is important because it is designed to work within the framework of our traditional, free enterprise system. By monitoring developments on a worldwide basis, the Council can provide both Government and industry with early warning of economic trends which could trigger inflation or business recession.

With this vital information, the public and private sectors can work in harmony to establish and maintain economic stability. For this reason, we endorse the objectives of the Council and we support the legislation calling for the Council's continuance in its present form through September 1977.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Hannigan follows:]

PREPARED STATEMENT OF JUDSON HANNIGAN, PRESIDENT, INTERNATIONAL PAPER COMPANY, ON BEHALF OF THE AMERICAN PAPER INSTITUTE

My name is Judson Hannigan and I am President of International Paper Company. I am speaking on behalf of the American Paper Institute, of which International Paper is a member and I am accompanied by Mr. John F. Darrow, Senior

Vice President and Mrs. Norma Pace, Vice President of the American Paper Institute.

We appreciate the opportunity to present to the Subcommittee on Economic Stabilization, the paper industry's views on some of the economic legislation currently before the Congress.

The American Paper Institute is comprised of manufacturers who produce more than 90 percent of the Nation's pulp, paper and paperboard.

In 1974, the paper and allied products industry produced 61 million tons of paper and paperboard, had net sales of $30 billion, and operated production facilities in all but one State of the Union. It paid nearly $8 billion in wages, salaries and benefits to some 700,000 employees.

Paper is a basic industry and among the 10 largest in the country. It is not a concentrated industry-it is a fragmented industry. There are some 300 companies in the paper industry, and the eight largest account for only 29 percent of total production, paperboard and pulp are internationally traded commodities with 10 percent of U.S. primary production exported. In addition, the U.S. imports substantial quantities of pulp and newsprint.

In our testimony today, we hope to:

1. State the paper industry's position on wage and price controls.

2. Summarize the industry's past experience under controls.

3. Comment specifically on wage and price legislation before the Congress, and

4. Call attention to the positive potential of the Council on Wage and Price Stability for helping this Nation grow in an economic sense within the framework of our free enterprise system.

First, let me present the paper industry's position on wage and price controls, based on 1971-1974 experience, that wage and price controls-which were intended to curb inflation-actually fueled inflation. Controls created distortions, inequities and shortages throughout our industry and in the economy as a whole. These distortions produced surges in demand, both real and artificial, a rapid escalation of prices and contributed substantially to the recession we are experiencing right now.

The long and varied history of controls in Europe is full of failures; not one attempt has succeeded. In the United States' recent experience, the inflation rate was more than twice as high when controls ended as when they began. Here are five ways in which controls impacted on the U.S. paper industry. 1. Controls created shortages of some papers. Some grades were eliminated because it was uneconomical to make them.

2. Controls almost put some smaller mills out of business.

Mills without pulping capacity had to buy their wood pulp in the world markets at uncontrolled prices.

3. Controls delayed decisions to invest in plant and equipment.

Projected returns on new investment were little better than breakeven. Small wonder reinvestment in the form of capacity additions came to a virtual standstill.

4. Controls could not be administered with equal success in all areas so that cost pressures continued to rise, resulting in delayed but nonetheless necessary increases in prices.

Here's a specific example. In August, 1971, the market price for containerboard A was $125 per ton. Two-and-one-half years later, the price was up to $165 per ton, an increase of 32 percent in 31 months-all under price controls. However, the capital costs required for new containerboard capacity were escalating so rapidly that the return on investment for a new containerboard mill was still less than six percent. Think of it! A 32 percent increase in price, during price controls, permitted less than six percent return on investment for new capacity. 5. Controls created "floors" for prices and "umbrellas" for producers. Prices went up during controls-never down.

With "floors" under prices, inefficient producers enjoyed an umbrella of protection against competition from efficient, low-cost producers. Customers lost the advantages normally offered by the competitive supplier who is constantly striving to produce and sell a higher quality product more efficiently.

Having been through this type of experience under controls, the paper industry is wary of legislation which could involve or lead to economic constraints. There is some legislation pending which, if enacted, would put us right back into controls. There are other bills which would be a further step toward government participation in wage and price decisions.

We have been asked to comment specifically on some of this proposed legislation. First, let's look at H.R. 4214. This bill calls for a new, independent Price Restraint Board with broad discretionary powers. It includes the basic guideline of no profit margin increases over an unspecified base period.

Freezing profit margins obstructs the accumulation of capital so urgently needed for the creation of new manufacturing capacity and new jobs for American workers. This happened in the paper industry under controls. Then, when controls were lifted and our profit margins were "unfrozen," many expansion projects-which had been held in abeyance were started.

It is noteworthy that H.R. 4214 features broad mandatory provisions regarding prices, but calls only for voluntary guideposts for wages. Labor presently accounts for approximately 70 percent of the cost of national output.

The conceptual fallacy here is in separating prices and labor cost. From the standpoint of a manufacturing industry, they cannot be separated. They must be treated alike. And, in our experience, the national interest is best served when both prices and labor costs are established in the free marketplace.

We have also been asked to comment on H.R. 4594. This legislation could require detailed, comprehensive recordkeeping-a whole new accounting systemby arbitrarily defined product lines.

How to create this new, different and separate system of accounting which, incidentally, would not be of any value to management in running the businessstill eludes the best accounting heads in the nation. I would like to quote an excerpt from the Congressional testimony of Robert K. Mautz, a certified public accountant and a partner in the firm of Ernst & Ernst. Quote:

"One important reason (that line-of-business reporting is impracticable) is that no generally accepted accounting principles have yet been established to provide guidance and to assure some degree of uniformity, and therefore of reliability and comparability, in the preparation and presentation of line of business reports."

Section 4 of H.R. 4594 requires prenotification of up to 30 days for a price increase for firms with sales in excess of $250 million annually. Another section of this bill provides for an unlimited delay in any proposed price or wage increase. Our reaction to these aspects of the bill is that we had prenotification and delays under wage and price controls . . . and, they were completely ineffective in holding down inflation.

We believe that price changes must be implemented when market forces require them and wage changes must be made in accord with contract provisions. Sections 3 and 6 of H.R. 4594 provide subpoena power at the Council's discretion. It is our opinion, such power is unwarranted and would be counterproductive to the competitive processes on which our economy is based.

Let me explain. If an individual company's cost and profit information is subpoenaed, there will be pressure to make it public. And, if a particular company's costs are known, its competitive posture is severely impaired. This could lead to serious dislocations in the marketplace with-in many instances-loss of jobs. Title 1 of S. 409-which was passed by the Senate on May 6-includes basically the same recordkeeping requirements and subpoena power provisions as H.R. 4594. Our comments on these onerous features apply equally to both pieces of legislation.

The Subcommittee has also asked us to comment on H.R. 5142. This legislation calls for the complete and immediate abolition of the Council on Wage and Price Stability. The American Paper Institute does not think that such drastic action is necessary.

This presentation has been rather negative, so far, and the Subcommittee may be wondering quite justifiably what we support. The American Paper Institute supports unequivocally H.R. 6577. This bill, in essence, calls for the continuation of the Council on Wage and Price Stability as presently constituted through September of 1977.

We have spoken in opposition to much of the proposed wage and price stabilization legislation before the Congress because we consider it negative—if not downright punitive-from the standpoint of growth in the U.S. standard of living, improving productivity curing our economic ills, creating jobs and improving the nation's balance of payments.

We believe that the Council as presently organized is doing and can continue to do, an efficient job of analyzing and reacting to inflationary pressures as they develop in the U.S. and worldwide.

I would like to quote item (6) under Sec. 3(a) of the Wage and Price Stability Act. "The Council shall monitor the economy as a whole by acquiring as appropriate, reports on wages, costs, productivity, prices, sales, profits, imports and exports."

We are aware that there may be occasions which require the Council to study the build-up of pressures which could involve wages and prices. It is our belief that both industry and labor wish to cooperate with the Council to identify situations which might contribute to inflation.

Therefore, in conclusion, we believe that the best deterrents to inflation are increased productivity and an adequate supply of product. These goals are best achieved in a free market in which prices and wages are established by laws of supply and demand.

From the standpoint of the U.S. economy, the Council on Wage and Price Stability in its present form is important because it is designed to work within the framework of our traditional free enterprise system. By monitoring developments on a worldwide basis, the Council can provide both government and industry with early warning of economic trends which could trigger inflation or business recession.

Mr. BLANCHARD. Thank you.

Mr. Stewart.

STATEMENT OF CHARLES W. STEWART, PRESIDENT, MACHINERY & ALLIED PRODUCTS INSTITUTE, ACCOMPANIED BY DON MARSTON, COUNSEL

Mr. STEWART. Thank you, Mr. Chairman.

I am Charles W. Stewart, president of the Machinery & Allied Products Institute, which is the national spokesman for the capital goods and allied equipment industries of the United States. I am accompanied by MAPI staff counsel, Don Martson. He has developed expertise in the area of price and wage control authority and administration as a result of being responsible for MAPI coverage of this subject during the last price-wage control period. I will ask our entire statement be incorporated in the record.

Mr. BLANCHARD. Without objection, so ordered.

Mr. STEWART. It is a privilege to appear before this subcommittee. As indicated at the conclusion of our written statement, we wish to commend the subcommittee for holding these hearings and giving interested parties an opportunity to build a record not only for the immediate legislative purpose but for educational objectives with respect to a complicated and very much misunderstood area of public policy. We ask that the complete text of our written statement be ac

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Incomes Policy Legislation, 1975: Hearings Before the Subcommittee on ...