The powers of the Board are varied enough to allow it to deal with a wide range of situations. It will classify firms in terms of their annual sales. In Group I will be firms with annual sales between $250 and $500 million. In Group III will be firms with annual sales below $250 million. Although the Board will regulate primarily the firms in Group I, it is given sufficient power and flexibility to make exemptions and category changes on the basis of the competitive structure of the price market, to foster orderly economic growth, and to combat domestic shortages of raw materials and local labor. In addition, the Board may adjust for changes in the domestic value of the dollar and prevent gross inequities, hardships and other disruptions in the marketplace.

Mr. Chairman, the Price Resistance Board will issue standards and guidelines for non-inflationary price adjustments primarily based on the stability of profit margins per unit of output for any firm, product, or product category. The Board can require a 30-day pre-notification of proposed price changes, or it can delay proposed price increases in whole or part for up to 60 days for any firm in Group I, provided that there has been more than a 3% per annum price increase rise for three months. It can also disapprove proposed price increases in whole or part and rollback prices for any firm in Group I. However, to take this action the price index for the concentrated industry in question must have risen at a rate of more than 6% per annum for 3 months, or the proposed price increase must be so large that it tends to thwart the purposes of this Act.

Since the Congress allowed the Economic Stabilization Act of 1970 to expire in 1974, there has been a need for stronger controls to counteract inflationary pressures. Several polls by George Gallup and Time Magazine have shown that the American public favors a return to some form of stronger economic controls. Gallup polls have shown that as of early 1975, 75% of those Americans polled predicted that prices would continue to rise at a rapid rate as well. Therefore, the need for such action is still seen by a majority of the public to be necessary. In response to public pressure and widespread awareness of the need to control and combat inflation, the Council on Wage and Price Stability was approved by the Congress in August of 1974. Unfortunately, though, the Council has proved to be a weak board, with no authority independent from the Executive. It can only rely on the powers of publicity and persuasion. An advisory board with no enforcement powers is hardly sufficient to deal with the inflation problem. Therefore, I strongly believe that a Price Resistance Board, at least in the concentrated industries field, is necessary to dampen the inflationary pressures now being felt throughout the United States.

Mr. Chairman, we need strong controls and guidelines to prevent needless and harmful inflation, largely caused by price increases in selected industries. It is for this reason that I support the Concentrated Industries Anti-Inflation Act, and I urge this Subcommittee to act favorably in its consideration of the bill.

STATEMENT OF HON. JAMES C. CORMAN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA

Mr. Chairman: Thank you for affording me this opportunity to express my support for H.R. 4214 establishing a Federal price review and control board to monitor concentrated industries and their price adjustments.

As we all well know, this Nation is experiencing an economic slump characterized by simultaneous inflation and recession. According to traditional economic thinking this is impossible. The classical theory attributes inflation to too much demand with too much money chasing too few goods, or recession from too little demand without enough money chasing goods. Traditionalists justify only one other type of inflation called reflation. This is characterized by a rise of marketdominated prices in a recovery from a deep recession or a depression, and is considered a normal and necessary part of economic recovery. Not until recently could classical theorists explain how inflation and recession exist simultaneously. Gardiner C. Means, a prominent economist, has conducted extensive and comprehensive studies on the types and causes of inflation, concentrating on the period from the mid 1950's to the present. His analysis reveals a third or "new" type of inflation which sustains both an inflationary spiral and a high unemployment rate. It is known as administrative inflation. It is characterized by a rise in prices in the more concentrated industries where there is a considerable area of discretion within which pricing policy can be made. Mr. Means has determined that administrative inflation arises from either labor seeking to push up wage

rates faster than productivity or from management seeking to increase profit margins too much or from a combination of the two.

Our present economic picture incorporates administrative inflation with two other factors: (1) an increase in the cost of raw materials; and (2) unprecedented pressure from the oil cartel which has forced fuel and petroleum related product prices to skyrocket. Each contributing factor must be dealt with effectively if this nation is to recover from its present economic hardships. Our task today is to closely scrutinize the source of administrative inflation and curtail its abuses in the marketplace.

Careful examination of unsound economic periods in recent history (1956– 1957, 1969-1970, and 1973 to the present) indicates that prices in concentrated industries rose dramatically, while prices in less concentrated industries declined or rose less. In April of this year, Gardiner Means presented a study to a conference held by the President's Council on Wages and Price Stability showing that an index of prices for 6 concentrated industry groups (rubber, nonmetallic minerals, paper, metals, machinery, and transportation) has risen 23% while others labeled competitive have been virtually stable. Means also explained that if prices in the more concentrated industries, those say four companies that do a quarter of the total business or more, go up in recession the net effect can be rising prices and unemployment. From this and other pertinent data. Means determined that administered prices, prices fixed by large industries dominated by a few companies, which do not have any regard for the influence of supply and demand, caused 1⁄2 of the increase in the wholesale price index since early 1974.

Without some degree of control in the area of concentrated industries, we are likely to have continued strong, single digit inflation in a large part of industry. For this reason I appear before your Subcommittee today, Mr. Chairman, to recommend approval of H.R. 4214, setting up new guidelines for both business and government that will minimize administrative inflation and abuses on the marketplace, and maintain high productivity and employment. Any program drafted by this Congress to stimulate the economy and its recovery, must include some means of monitoring concentrated industries and dealing with the administered prices problem.

H.R. 4214 would be a major step toward controlling administered prices. As you know, this legislation would establish a five member independent Price Resistance Board appointed by the President with the advice and consent of the Senate. This structural arrangement of a price review and control board would remove the Board from under the thumb of the Executive Branch which appears to be unsympathetic to the problem of administrative inflation. The Board would be empowered to request prenotification of concentrated industry price increases, delay price increases, disapprove price adjustments, or rollback prices. It must be clearly noted, however, that the Board's function to curtail sharply rising prices would be strictly limited to a few hundred corporations which set unfair prices by controlling a substantial share of a given market and which are outside the discipline of competitive market practices.

This measure is in no way designed to reinstitute across the Board wage and price controls, but rather to curtail unnecessary price hikes by concentrated industries and to restore a healthy economy. The Concentrated Industries AntiInflation Act of 1975 would also provide a direct response to the public's demand for an effective economic recovery program. Support for either a return to wage and price control or a stronger economic stabilization program continues. Within the past year several public opinion polls have been conducted which reflect these sentiments. One indicated that 50% of those questioned favored stronger measures than those contemplated by the Administration which included wage-price guidelines and reactivating the Cost of Living Council. In its desire to cooperate with President Ford in initiating an effective economic policy. Congress swiftly passed a measure creating the Council on Wage and Price Stability in August. 1974. Its task is to monitor wage and price policies of business and labor without setting up stiff anti-inflationary, anti-recessive guidelines. The Council is due to expire this August unless its tenure is extended by Congress. Mere extension of this body, under the thumb of the Executive, clearly will not bring a turnabout in our present economic state. Only through mere defined and responsible legislation can we combat inflation and return millions of unemployed to work. It is my hope that this Subcommittee will carefully review all provisions of H.R. 4214 and approve strong legislation to control inflationary practices of concentrated industries. I am grateful to you and your Subcommittee for considering this measure and urge you to take favorable action H.R. 4214.

STATEMENT OF JOSEPH MCEWEN, PRESIDENT, NATIONAL ASSOCIATION OF WHOLESALER-DISTRIBUTORS, WASHINGTON, D.C., ON EXTENSION OF THE COUNCIL ON WAGE AND PRICE STABILITY

My name is Joseph McEwen. I make these remarks in my capacity as President of the National Association of Wholesaler-Distributors (NAW). You should also know that I am President of Modern Handling Equipment Company of Philadelphia, Pennsylvania, a firm which distributes material handling equipment and supplies. I am also a Past-President of the Material Handling Equipment Distributors Association.

The National Association of Wholesaler-Distributors is a federation of 95 national commodity-line associations which in turn are composed of some 30,000 merchant wholesaler establishments located throughout the 50 states.

NAW sincerely appreciates the opportunity to express our industry's views on legislation currently pending before this Subcommittee concerning the future existence and powers of the Council on Wage and Price Stability.

Our members are, with few exceptions, small to medium-size independent businesses. Almost all of the nation's wholesaler-distributors were eligible for the Small Business Exemption of Phases II-IV which provided that firms with 60 or fewer employees were not subject to controls. Nonetheless, we saw and experienced the increasingly negative effects of controls and have learned from this experience that controls on one segment of the economy inevitably have a multiplier and rippling effect. They distort and impede the market mechanism, thwart production, breed shortages, and do not cope with inflation.

It is from our experiences during the August 15, 1971-April 30, 1974 experiment with controls that our concern with the bills before this Subcommittee stem.

Recognizing the ineffectiveness of controls in dealing with double-digit inflation, the Congress-wisely-allowed the Economic Stabilization Act to expire. However, in establishing a "monitoring" unit, the Council on Wage and Price Stability, we feel the Congress has created an ineffective and unnecessary— watchdog which has only served to perpetuate the threat of re-imposition of controls. Such a lingering reminder of our unhappy experience with controls can be expected to have little positive effect in diminishing the rate of inflation. This fact was recognized by the Director of the Council on Wage and Price Stability, Albert Rees. In testimony before the Senate Banking Committee on March 4, 1975, he stated:

"Indeed, inflation would probably be subsiding even faster were it not for the widespread fear that Congress will re-impose wage and price controls. This fear makes businesses reluctant to cut prices and labor unions reluctant to moderate their wage demands, lest they be frozen in an unfavorable position by a new controls program."

We agree with the Barron's editorial (December 23, 1974), which stated that "imposing wage and price controls is one of the few vices in life that is nearly as damaging when you talk about it as when you actually do it".

In reviewing the various bills presently before the Subcommittee dealing with this issue, I find little to allay the "widespread fear" of re-imposition of of controls which Dr. Rees mentioned.

S. 409, as amended on the floor of the Senate, would allow the CWPS to require periodic reporting by product line and to issue subpoenas. H.R. 4594 includes, in addition to the provisions contained in the Senate bill, a provision for prenotification of up to 30 days for a price increase for firms with sales in excess of $250 million annually. Another section of the bill provides for an unlimited delay in any proposed wage or price increase. Such provisions only serve to broaden government influence in the wage and price area through a “quasi-control" process, and lend credence to the fear of "creeping" controls.

A more serious threat of a return to mandatory controls is presented in H.R. 4214. This legislation would create a permanent, independent Price Restraint Board to regulate the so-called "concentrated" industries-firms with at least $250 million annual sales and 15% of a given market. These firms would be subject to prenotification and delay provisions. In the case of industries concentrated to a greater degree-$500 million annual sales and 50% of the market-the Board would have greater regulatory powers, including disapproval of proposed price increases and rollbacks of excessive prices. Most importantly, H.R. 4214 would "stabilize" profit margins over an unspecified base period. Regulation of the margin of profit, which provides the capital necessary for expansion, in

creased productivity, and new jobs, would severely obstruct the basic functioning of our economic system.

In summary, we agree with those appearing before this Subcommittee who feel the Council on Wage and Price Stability has proved to be an ineffective means of fighting inflation. However, we must disagree with those who feel the answer lies in "beefing up" the agency by granting it additional powers or by establishing an independent Price Restraint Board.

The economy must be allowed to function unhampered by restraints or controls of any type. For this reason, we urge your consideration of legislation sponsored by Mr. Rousselot, Mr. Levitas, and others which would simply allow the Council on Wage and Price Stability to expire on August 15 of this year. Thank you for the opportunity to express these views.

STATEMENT OF ARMCO STEEL CORP. TO THE SUBCOMMITTEE ON ECONOMIC STABILIZATION OF THE HOUSE COMMITTEE ON BANKING, CURRENCY AND HOUSING Armco Steel Corporation believes that price-wage controls are not in the best interests of consumers, producers, taxpayers and investors. We support legislation such as H.R. 5142 (the Levitas bill) which would terminate the activities of the Council on Wage and Price Stability. At the same time, we are opposed to all measures which would perpetuate economic controls in the form of standby authority, direct controls, selective price controls or monitoring.

The mere existence of threats to the free functioning of markets and labor negotiations is currently keeping prices and wage demands at higher levels than would exist in the absence of those threats. Companies and individuals, facing the uncertainties of future freezes, rollbacks, delays and similar actions simply do not want to be caught in a disadvantageous position if and when controls are activated. As a result, progress in reducing today's inflation is being retarded. More importantly, economic controls can neither stop nor regulate the rate of future price or wage increases without causing serious economic difficulties. Meanwhile their consideration is inhibitng recovery. Controls work on the symptoms of inflation-not its real causes. We suggest that the latter be investigated, analyzed and treated directly, thus ending the futile search for an easy way out of our economic difficulties.

It is evident from the wide and conflicting array of proposals in H.R 6577, S-409, H.R. 4214 and H.R. 4594 that those who favor price controls are far from agreement on who should be controlled, the procedures to be used, the trigger points for investigation, definitions and standards. Administration of any of the above proposals thus becomes a matter of bureaucratic judgment in which companies are subjected to capricious actions not always dictated by economic considerations. Such expedient experimentation will not only fail to solve the problem of inflation, it will also seriously damage the longer range stability and growth of the economy.

The complete failure of recent broad scale controls is shifting emphasis to selective controls. Based on faulty theory, selective controls would be even more unworkable than broad controls.

And in the absence of the discipline of equal treatment, the potential for unfair, heavy-handed treatment of inflation's symptoms would be increased.

Selective price controls are proposed in H.R. 4214 and 4594 are based on the theory that inflation is caused by administered pricing in concentrated indutries. A growing body of empirical evidence indicates that this theory is highly questionable, if not entirely erroneous. To construct and operate a price control system on the shaky assumptions and biased data selection of administered price theory will not only fail to stop inflation, it would be extremely unfair and detrimental to companies in basic industries.

Inflation is a process that begins with the creation of demand in excess of the economy's ability to supply. It does not spring up simultaneously in all industries or entire economic sectors, but rather, slowly works its way through the complex cost-price system at each stage of production and distribution. Both large and small companies are impacted in the same orders of magnitude, although at different points in time. In the end, costs have risen for all companies. A price control system that permits some companies to recover those costs and denies others the same right will disrupt markets and distort investment flows between companies and even between entire industries.

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In the steel industry, for example, delay or denial of cost recovery by large firms would prevent smaller uncontrolled steel firms from recovering their costs in a weak market for fear of losing business. In a stronger market, uncontrolled companies could raise prices to recover costs even though larger firms may be denied or limited in their cost recovery. The net result would be a stagnant steel industry. Smaller companies would become dependent on periodic episodes of demand spillover for survival, and the larger firms could neither generate nor attract the capital necessary to grow.

Selective controls would destroy the relationships between large producers and their suppliers and customers, and in the process, reduce investment and job creation for all. Again, in steel, a large company buys from many suppliers and sells to many customers, including a significant number of both that would not be subject to controls. The inability of a controlled steel producer to recover higher costs from suppliers along with the simultaneous sale of artificially low-priced material to customers would maintain or enhance their margins at the expense of an intolerable squeeze on the controlled producer. It requires no great stretch of the imagination to figure out where capital would flow under those conditions. But even those flows would be temporary. A shrinking steel industry would need fewer suppliers, and its customers would be forced to buy from foreign sources no matter what the price.

Large, selectively controlled companies within all industries could ill afford to pass up any opportunity in export markets, particularly in periods of high worldwide demand. With profit margins on domestic sales squeezed, it would become extremely difficult to adhere to commercial policies favoring domestic customers, as many large firms did in 1973-1974. In Armco's case, for example, we did not increase the proportion of our oil country tubular goods going outside the U.S., despite substantially higher prices overseas during the shortage. Under selective controls, materials and products forced into export markets in periods of high demand would accelerate domestic inflation as customers bid for the output of uncontrolled or foreign suppliers.

The U.S. economy was plunged into recession by inflation in 1974. Signs of recovery are reappearing along with a slowing of inflation. There is opportunity to make additional progress in reducing inflation and promoting renewed growth in production, employment and investment. And one of the surest means of accomplishing those desirable goals is to lift the threat of disruptive controls entirely so that planning for investment and job creation can proceed with confidence. [Whereupon, at 1:05 p.m., the hearing was adjourned, subject to the call of the Chair.]

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