notification; we have carried forward essentially the same Phase II rules.

Mr. McLANE. But the major differences-I think, again, that it should be pointed out-that we talked about when we first initiated these on July 18th, or issued these on July 18th, are fairly substantial; the major one being the cost absorption that is expected by the changing of the base period from which you can justify your price increases, and from which you can justify your cost, and the dollar-for-dollar pass-through. In other words, you are not allowed to add on profit margin on cost. It is a dollar-for-dollar pass through system.

MEMBER OF THE PRESS. You have expanded your base period, but that doesn't change what you have been saying.

Mr. McLANE. No. We have not expanded our base period. There are some technical modifications.

Mr. WALKER. The base period in Phase II, you will recall, was a one-month period prior to August 15, 1971. The base period in Phase IV is the fiscal quarter ending at the end of 1972. That is, it is expanded in that sense.

However, it is brought forward in time so that the effect is to require a rather substantial degree of cost absorption on the part of firms.

I would supplement Mr. McLane's remarks also by indicating and reminding you of two other cost absorption features, that were announced on July 18, which are carried forward in these regulations.

That is, first, that firms are required to begin with actual base prices; not authorized base prices. That is to say, not prices that were authorized under previous Cost of Living or Price Commission rules.

Secondly, that base period must be computed on the basis of average prices in effect during the period of the base period. That is, the last quarter of 1972, and not on the basis of the highest 10% of transactions taking place during the base period.

Both of these features are carried forward in these final regulations in much the same manner as they were initially announced on July 18.

MEMBER OF THE PRESS. I don't see any

of wages or prices in here.

mention

Is there any coverage of wages or prices?
Mr. WALKER. Wages and salaries, do you mean?
MEMBER OF THE PRESS. Yes.

Dr. DUNLOP. Wages and salaries?

Well, these are price regulations. We earlier, on July 18, announced the approach that would be followed on the wage side, which was simply, in the main, to carry forward the wage standards which had been the basis of Phase II and Phase III.

In other words, some additional furnishing of information is required, setting up of a special administrative unit dealing with Government, State, and Local Government wages cases. But, on the standard side, the standards that were announced on July 18 were the same as those that had been in effect earlier.

MEMBER OF THE PRESS. Why are you giving the Retail and Wholesale Industry, or assigning them, a full year base period? What is the significance of the February 5 date?

Mr. WALKER. The answer to that question is as follows: The February 5 date was chosen because there are a large number of retail firms that have fiscal years ending around January 31, February 1, February 2-February 3, even. There is just an unusual set of fiscal year-ends in that industry.

Secondly, as to the duration of the base period, this carries forward the principle that was established in Phase II which, you recall, is a much different set of controls on the Retail and Wholesale side, than it is on the Manufacturing and Service side.

In the Retail and Wholesale Industries, firms must control their prices on either a mark-up or a margin basis applied to merchandise categories that they sell. The prices in those categories must be controlled so that either the mark-up, or the margin, does not exceed the higher of the category mark-up or margin in the corresponding fiscal quarter of the base period; or the entire year base period mark-up or margin.

MEMBER OF THE PRESS. The price increases above the base price or adjusted freeze price must be prenotified by firms over $100 million.

Firms smaller than that can go ahead and increase above the base price

Mr. WALKER. Only to the extent that they have cost justification in accordance with the rules that

we

MEMBER OF THE PRESS (interposing). How are you going to monitor that? Will the IRS be monitoring this?

Mr. WALKER. That is correct. We will monitor category No. 2 and category No. 3 firms that is,

smaller than prenotification firms through the IRS network, in much the same fashion as was accomplished during Phase II.

Mr. McLANE. I think it is important, also, to point out that the $50 to $100 million will be getting quarterly reports, the same as we did during Phase II, so that, over $100 million, you prenotify. In fact, above $50 million, you have quarterly reports, and the below $50 (million)-or what we would call Tier 3-we will run audits, checks, to insure their responsibility for keeping records.

MEMBER OF THE PRESS. Mr. Walker, it says they have to keep records. It does not say, as far as I can see specifically, they have to have Cost of Living Council forms.

Mr. WALKER. That is correct. They will be required to maintain records sufficient to be able to demonstrate to a representative of the Economic Stabilization Program that they are in compliance with the rules, but we are not requiring those firms to either maintain, or have in their files, or to file with us, the rather detailed and complicated forms that are required for larger companies.

MEMBER OF THE PRESS. Why did you decide not to, any longer, require CPA's to certify these reports of notification?

Mr. WALKER. We felt that the requirement for the so-called "cold comfort letter" that was in the Phase II regulations, did not significantly advance the quality of the product that we received; that the firms were perfectly competent to fill out these forms and certifying to their accuracy themselves; and that we did not feel it was appropriate to require a CPA certification.

I might also add that, among the comments we received, that was one that reappeared on a large number of occasions, both from firms stating that they did not feel that the requirement for the CPA was necessary and, also, from CPA's themselves, saying they did not believe this was either a necessary or a desirable requirement.

MEMBER OF THE PRESS. What is a "volume offset," and why is it not any longer required?

Mr. McLANE. Now we are getting down there! Mr. WALKER. The Phase II and Phase III rules required that firms, in computing their price increases, take into account a volume offset in the case of firms whose volume of sales was increasing, which, presumably, thereby would produce a unit cost decrease by virtue of spreading out overhead and other fixed costs over a larger number of units.

The rule was phrased in such a fashion as to require firms to take a volume offset when they increased their volume, but did not permit them to take a volume offset when they decreased their volume so as to justify a price increase. We received a large number of comments on this and, after consideration, felt that the rule, as stated, probably was not equitable and that, in any event, the degree to which we could enforce and administer a volume offset was very dubious; the problem being that a volume offset necessarily includes projections as to what the volume of sales are going to be, and that is very much of a sometime thing; with the result that there were disagreements with firms. It was a very much of an ad hoc kind of a decision that had to be made in virtually every case. We felt that no dis-service would be made by dropping this and, in fact, it would make it more equitable, and more forcible, to eliminate the whole volume offset concept.

Dr. DUNLOP. May I comment on one further aspect of it.

First of all here, as elsewhere, we have been trying to learn not only from comment but, from the experience within the Agency, with the degree of administerability of various concepts and rules under Phase II. And our staff, reporting on their experience with this rule, felt it had not been very administrable; it had not been very helpful; it would cause more trouble than it was worth.

Another point, however, to mention to you, is that these rules contain a so-called productivity offset which, as you know, is applied to labor costs; that labor costs must be reduced by an Industry average figure of the increase over a decade or so, of the average rise in labor productivity. There is a case where we felt the rule, the offset, was thoroughly administrable. There are problems with it in some Industries, which we may have to look at specifically but, on the whole, it was a good rule, an administrable rule and, therefore, we continued it. The volume offset we found to not have been a good one; therefore, we have discontinued it.

MEMBER OF THE PRESS. Dr. Dunlop, what is your evaluation of the price performance in the Food sector, so far, under Phase IV?

Dr. DUNLOP. Do you mean since July 18? Well, I am not sure I have any reliable numbers on which to make very much of a statement. There have been, as I recall, no Cost-of-Living Index Numbers, or CPI numbers, available and, since then, we have been, of course, following the generalized

reports we get. I would have said, myself, that the price movements that I have seen at least, are about what we expected. But until we get some hard. numbers, it will be very difficult to make the kind your of comment that is appropriate under choice of the word "evaluation".

MEMBER OF THE PRESS. Are you beginning to have second thoughts about the beef series?

Dr. DUNLAP. There is no change in that position. MEMBER OF THE PRESS. Dr. Dunlop, is there anybody considering changing that?

We keep getting some very "wobbly" statements from various members of the Administration. Is it fixed and firm until September 12? Dr. DUNLOP. I have nothing further to add to what has been already said on that subject. MEMBER OF THE PRESS. What has already been said that you have nothing further to add to? (Laughter)

ANOTHER MEMBER OF THE PRESS. Are you considering the need for export controls on wheat and other commodities, perhaps into the next crop year?

Dr. DUNLOP. Well. I think the authoritative statement on that subject is the President's statement of July the 18th, and there is a particular paragraph which sets forth the policy of the Administration on that subject.

The only other statement I make, which is included within that, is that we continue to secure information each week on the extent to which orders for exports have been made, and the dates under which contracts for exports are to be effective.

MEMBER OF THE PRESS. Why were export controls rejected on copper and scrap?

Dr. DUNLOP. There are a number of reasons. That is not our decision, of course, in the Cost of Living Council.

MEMBER OF THE PRESS. Could you enlighten us on that?

Mr. McLANE. Well, I think, obviously, it was one of the options that, when you look at a problem-the scrap problem, such as copper, that we considered-it was determined quite simply that, in the copper scrap area, you have literally thousands of little operators that are dealing in this enterprise, and that if you were to impose export controls of one type or another, it would be virtually unadministrable. It would be very, very difficult to impose. So that, in fact, you would be

doing something that you would not be able to keep a handle on.

MEMBER OF THE PRESS. Do you mean you could not keep people from cheating?

Is that what you mean?

Mr. McLANE. What I am saying is: If you put export controls on, in fact, you would be saying that. But, in fact, you could not really be doing that because there are so many little companies that are in this type of business.

Secondly, I think it was determined that, by exempting copper scrap, you would not appreciably affect, or really not have any great effect at all, in terms of the price increase in terms of broad economic increases, as a result of copper scrap increases increasing somewhat; and

Thirdly: That the exemption route would, in fact, permit copper scrap to begin flowing again in the system of the two: wire and other manufacturing. Essentially we got into a point where that had stopped flowing.

MEMBER OF THE PRESS. Do these regulations in themselves, say, lay down the procedures by which companies can apply for exemption?

Mr. WALKER. No. The procedural regulations are in the process

MEMBER OF THE PRESS (interposing). I mean, industries.

Mr. WALKER. Yes. The procedural policies governing the interaction between the Economic Stabilization Program and the economy are in the process of their final drafting right now. We expect the Executive Committee will meet on them this afternoon. We expect to be issuing those procedural regulations at about the same time we issue the Oil and Insurance regulations later on this week.

MEMBER OF THE PRESS. Will they just spell out the procedures for coming to you to talk to you, or exectly what criteria must be met?

Mr. Mc LANE. They spell out exactly what companies have to do in terms of where they file; how they file; also, that they look to, in terms that are very specific, what they do on the forms. An awful lot is in the instruction to the form; in terms of how they have to fill out the different pieces.

MEMBER OF THE PRESS. I was referring to the idea of exempting a broad category as time goes

on.

Mr. WALKER. I misunderstood your question. MEMBER OF THE PRESS. They are not in here.

Dr. DUNLOP. No; they are not. They will not be set forth this week. We will address ourselves to that question in due course. It does seem to me that that is a sort of subject that will need informal conference; it will need conferences; it will needI have already indicated on more than one occasion, I think, some of the principal considerations that one would want to take into account.

Three, I might repeat here, One is: We are interested very much in the recent course of price behavior.

Two: We are interested in the projected demand and supply conditions in the market, so that one can have a realistic view as to what the course of prices will be over the next six, nine months, year, or so forth.

Three: We are interested as to what is happening on the wage side; so that if we carry through the normal view, there are some overlapping sectors which make this difficult.

Normally, one would want to exempt both prices and wages, and one would need to know what the circumstances were, on the wage side, at the same time.

Those are, at least, three of the groups of questions we would want answers to in thinking about that subject.

But, to be very candid with you, I am not anxious to get deeply involved in that process until we have all of Phase IV in place and in effect, and have a chance at that time to begin to think about the longer term.

MEMBER OF THE PRESS. Might that also reflect your thoughts, that you have mentioned from time to time, on the possibility that industries now operating at 100% of capacity, might be offered some kind of price incentive to expand the capacity in that Industry?

Mr. LARSON. That certainly is one of the things that we would look at. Dr. Dunlop has said, on many, many occasions, it is supply and demand in proper balance that is going to bring prices to reasonable levels. And increase in supply which would be achieved through additional amounts of capacity would be one criterion that certainly would be considered in a decontrol effort.

MEMBER OF THE PRESS. Are you now in a position to project, on a percentage basis, the increase in cost to the consumer by the end of Phase IV? Mr. WALKER. NO.

MEMBER OF THE PRESS. Are you in a position now to give us any information which you think is

going to be the size of the bulge; or the duration? How long is it going to be before we are able to look at price indices and say, "Okay, that is sort of what is going on in Phase IV"?

Dr. DUNLOP. I guess the answer to that is, "No", but let me add to it in this way:

First of all, I think it is important to be clear that there is no kind of absolute size of price bulge. That it will vary-the aggregate of price increases will vary, in my view, with at least two major considerations.

One is their process by which they are spread out over time and, secondly, the time they come through, because with a cooling economy--and we do have a cooling economy-the impact, on prices, of a given cost position varies a great deal. All you have to do is go back and look at Phase II to see enormous amounts of cost justification, in any proper sense of the word, which never saw the light of priced day, if you like.

Why? Because the market would not support them. The cooling of the economy will mean that a great deal of cost justification that remains, after we have cut away a great deal of it, will impact prices, depending upon when those cost increases are permitted to have a price impact.

MEMBER OF THE PRESS. If I can narrow you down, Dr. Dunlop

Dr. DUNLOP. You can try!

MEMBER OF THE PRESS. After August-the first month or so after August 12, the biggest companies will not be able to raise prices?

Dr. DUNLOP. That is correct; save in those cases where they petition for an exemption to that month-an exception to that month-and where we grant it.

MEMBER OF THE PRESS. How much of a bulge might you see from the middle size companies raising prices in the first month or so!

Dr. DUNLOP. I don't know.

Mr. LUKSTAT. Time for one more question, please.

MEMBER OF THE PRESS. Is the Postal Service covered on this?

Mr. WALKER. Yes.

Dr. DUNLOP. The regulations that were in draft form have not been altered in this respect, and the Postal Service remains subject to explicit control of the Cost of Living Council on Postal Regulations.

Mr. LUKSTAT. Thank you for coming.

(Thereupon, the Press Briefing was concluded.)