Mr. ADAMY. The most expensive phase to us was III-12, the most expensive of all. Phase I came at a time when the country so desperately needed it. It was a very big 2 by 4 across the head of the country to say, "fellows, wake up." We are in real inflation. It was expensive, but that we lived through easily.

Phase II was very difficult because of the arbitrary rules that were imposed upon us. Phase III was difficult to live with, very difficult to live with, because only three of us were controlled, only three elements of the economy were controlled, and we were one of them.

And so in addition to the difficulties of the program, all of those people had all of that time to give us all of their attention, and whereas I do approve of attention from time to time, I thought that was a little much.

But phase III-12 was by far the worst because our retail prices were frozen, and the cost of our raw materials was not frozen. And so at the end of phase III-12, more than 30 percent of the supermarket companies in the country were operating at a net loss. So I cannot minimize: that phase III-12 was by far the worst.

Phase IV-A was not much better with respect to earnings and IV-B will be a little better. We certainly will not recover those earnings. But, will not continue to lose as much as we have been, because we are able to pass through the cost of goods sold.

The inequity of phase III-1/2 is something the country should never forget. You freeze at an intermediate point and duck; you cannot change-well, for example, we were frozen on beef at a time when the live weight price was not our prices were frozen at, give or take 92 cents, the average retail beef price. The live weight price sold to the farmer was $47 and during that period of time, the price went up to $58.

So those of you who got meat from a supermarket got it with the great graciousness of your supermarket operator, who paid dearly for the privilege of providing it to you. I think that is merely an example of hundreds of cases.

Senator MATHIAS. Well, that is not too different from the gas retailers of today, who are at the nozzle end of the hose and being expected to bear the economic burden.

Mr. ADAMY. It is the same thing, and there is a great amount of that still in the program, as we go through a great many of these distortions that are built into the program. And we are going through some very mean days right now in some respects.

Fortunately, on the meat or protein side, you have got a downward market, which is solving a lot of problems; and our ease of mind with phase IV-B is as much related to the downward trend of the meat. market as it is to any other single factor, I must add.

Senator MATHIAS. If live weights go up again, and I have heard of outlandish live weight prices like 321/2 cents, and I hear of one-this was a 4-H sale, where it is not a normal market situation—of $1 a pound live weight.

Mr. ADAMY. Well, I really do not expect it is going to happen, sir, because if it does I hope to find a far remote spot to hide in. But I do not think it will happen, because as you will recall in the period July 17 through September 9, there were a million less cattle killed this year than last year.

Now, these cattle out there overlayed the market. Now, as of today, the kill rate has not returned to last year's kill rate; so you tend to still build up the extra supply.

The second and more important factor is in late 1970, the market started to look good enough that cattlemen started to build up the basic census of the herd. And we had an increase in 1971 of 2.2 million in breeding a herd. Then in 1973, another 2 billion increase; and this year, it looks like there are 3 billion and underline it with "if Department of Agriculture statistics are correct." But there was a big build-up.

Right now we are at the beginning of the end of the 3-year cycle, so those cattle that were withheld, those heifers withheld for breeding purposes now are producing extra stock. Therefore, from this time forward, we will have a constant increase in the supply of beef. And I whistle nicely as I walk past graveyards, too, sir, but I really do have some optimism on that side; and on the grain side, the feed side looks much better. If the Lord keeps smiling and we get some dry weather in the Midwest and get those crops out of the field that are out there, we really should be in a much better position and will have reason to be optimistic about a rational price. Do not mistake me, we will not go back to the old days. They are not going to be $20 live weight cattle again-please God that there will not be.

We have no advantage in bankrupting the farmer; no one does. But on the other hand, rational prices, I think, are the objective.

Senator MATHIAS. What you are painting is a picture of an economic climate which really does not bring you into serious conflict in this particular area with the Cost of Living Council. In other words, it is a downhill slide.

Mr. ADAMY. That is future. Since August 15, 1971, we have been in very direct contact because it has been an unhill slide. Incidentally, we have begun to receive increases in canned and packaged goods starting with August 12, the beginning of phase IV-B for them.

Now, they were permitted some increases on September 12, and some on October 12, and we can only put a number in a store. So it will be sometime in November before this cost increase is reflected; if, as I hope and believe they are one-time-only cost increases, we will be through that. But we are still-on other than protein products-on an up market, and I am hoping that the American people will receive a very good Christmas present of a very good CPI. That would mean that in the first week in November the prices would be more favorable, and they would be reported on December 21, and it will be a nice Christmas present for our people to recognize that it had been a little bit better.

Senator MATHIAS. Well, now vou said in your statement that you did not want to go into any depth on the question of retroactivity, but what does retroactivity do in just a very broad, general sense?

Mr. ADAMY. It will just about ruin us. Let us talk about wages. Yesterday, I got a call from a nice little guy who has eight stores up in middle Pennsylvania. On the first of March 1972, a labor contract was terminated; a new contract was agreed to with a union in a very short period of time; reviewed by IRS in midsummer, rolled back to 5% percent; and, appealed by the union after being approved by the union sometime in the fall.

In September 1973-18 months later the appeal was granted for he full amount of the contract itself. This poor little devil is caught with 18 months of retroactivity-several hundred thousand dollars far n excess of his earnings.

Now, he is going to appeal, but how? And we will desperately try to help him out because of the inequity of a retroactive settlement.

On the price side of it, it is the same kind of thing. You take a decision, which you think is in the confines of the program, and the IRS comes along and says no; you were wrong. You are told to roll back prices to reflect that amount of money and give the customers back that amount of money, which can run from very little to quite a lot.

I think the most dramatic example I can give you is in a Southern State. One of my members, a rather small company of 35 or 40 stores, was ordered to roll back about a million dollars, and being a normal, competitive American, the company decided to make the best out of it. They sold 5-cent-a-pound sugar, and 19-cent chickens and really moved the million dollars out in a hurry. Every pantry in south Georgia was full of enough sugar to do whatever they are going to do in the next 5 years, and it disrupted the whole competitive structure. Obviously, the smaller the company, the more they were hurt by such an active program. So not only do you, the company get caught by those ripples that reach out to the far lakeside that is almost impossible to see. Retroactivity is a very cruel act, because planning ahead we expect to do that. Any businessman must be expected to meet his own future, but once you have lived through it and have to go backward by some arbitrary, capricious act imposed upon you from an omnipotent Cost of Living Council, it is very hard to live with.

Senator MATHIAS. Well, summarizing what I take for your testimony, if we have to review this Economic Stabilization Act at the expiration of the current period, you would like to emphasize the area of openness, which has developed, you feel under phase IV-B, in which there is greater access by the public, by the industry and by the consumers to the regulating agency; so that your views can have some realistic impact, and not just a formalistic finding.

And second, you would like to see the retroactive feature prohibited.

Mr. ADAMY. And add to that the element of certainty. We had an 18-day freeze. We had a 52-day phase. It is impossible to live with. Another good example-when phase II started, we had a 25-page booklet of regulations. When phase II ended, we had 586 pages of regulations. I almost broke my association with the mailing bills to get all the information out into the field to keep the people informed.

Change is another point in this. You need, as you say, regulations that have depth, understandable depth. In addition to that, you have got to quit changing the regulations every day, every minute, every hour.

Senator MATHIAS. One of the questions that has come up, and let me ask this very briefly, is in this area of certainty and of predictability; in that if there were public hearings of such substance that the area to be regulated could be totally examined, that then your industry, other industries, consumer groups could all come in and present the complexities of their particular situations, which could then be contem

plated. And that rather than have hundreds of changes on regulations, you would have one broad regulation under which an industry group could live from the very outset.

Now, my question is in your industry, do you think the situations or curred in such a crisis atmosphere that they had to go forward without these kinds of thoughts?

Mr. ADAMY. In my statement. I am much less critical of the actions in phases I and II then I am of the later actions. It was a crisis at that time, and the country was moved rather rightly or wrongly into that program, and there was a need to get expedition built into it.

I am much less critical of the beginnings than I am of the later days, and the needs of a continuing consulting network. Generally, I agree with Mr. Walker that any control program will distort and has inequity built into it; therefore, I do not see all of this need for so rapidly changing it than one inquity will not create five more, more careful it might

Senator MATHIAS. If you wait longer, you can ask for more views, you could get more information.

Mr. ADAMY. You could, well, be on a safer ground, a more solid ground, and a fairer ground for everybody; for consumer and for business alike as well as government.

Senator MATHIAS. Thank you very much.

Thank you both very much.

The information provided by the Cost of Living Council, which we referred to in these hearings as the IRS Manual, will be admitted into the record, and the record will be kept open for 10 legislative days for the addition of any related materials.

The hearing is adjourned.

[Whereupon, at 1 p.m., the subcommittee was adjourned.]

ADDITIONAL STATEMENTS SUBMITTED FOR THE RECORD

STATEMENT OF EUGENE A. MARCH

OCTOBER 18, 1973.

My name is Eugene A. March. I am vice president of Colt Industries Inc. responsible for the Materials Group of Colt. The Materials Group produces and markets specialty steels, through Crucible Steel, a subsidiary of Colt.

The Cost of Living Council has discriminated, under Phase IV, against Colt as a specialty steel producer. I speak about our own situation, by way of providing your Committee with a case history, but I should note for you that the specialty steel industry in general as well as Colt in particular is the object of this discrimination. I am speaking here only with respect to my own company, insofar as its experience illustrates present tendencies in the Council.

I bring the situation to your notice in hope that the Council can be encouraged to return to the procedures of fairness and equity which marked the administra tion of the Economic Stabilization Act before Phase IV. The criticism is not di rected at the law, but at variable application of the law which results in gros inequity for one industry. It is not the task of the Congress to execute the laws which it passes. But I know that the Congress is concerned to know whether or not the laws are properly executed.

The steel industry as a whole is accorded special treatment under Phase IV. Special Rule No. I. which the Cost of Living Council announced on September 10. 1973, restricted to flat-rolled steel the steel mill products for which price increases could be permitted in 1973. The Rule relates only to steel. It limits implementation of prenotified allowable price increase to an increase of one half on

1 See vol. 2 of these hearings,

October 1, 1973, and the remainder on January 1, 1974. Thus in two respects the industry is treated differently from most American industries. First, only one product is susceptible of price increase, regardless whether other products can be cost justified for increases. Second, only half the increase is currently permitted, regardless whether the entire increase is cost justified.

The specialty steel segment of the industry is subjected to further discrimination. Its flat-rolled product is excluded by the Cost of Living Council from price increase under special Rule I. That Rule as published does not mention exclusion of specialty steel flat-roll. The exclusion comes to light in the text of the order by which the Cost of Living Council sets forth its decision respecting an individual company's request for increases in prices of steel mill products. The order is a private document, not published, which makes it clear that the specialty steel industry is authorized to increase no price at all. The exclusion appears to be an example of rulemaking after the fact. That is indeed our own experience, that the Rule was changed without prior warning, without notice, and without hearing by the parties affected.

On August 7, 1973, the Cost of Living Council published "final regulations" for Phase IV. The regulations include "Subpart J-Special Rules," of which paragraph 150.220 "Stabilization of particular industries and sectors" states:

"(a) Whenever the Council finds it necessary to achieve the goals of the Economic Stabilization Program, it may issue regulations providing for the stabilization of prices in a particular industry, sector of the economy or part thereof.

(b) The Council may order public hearings with respect to the regulations issued or to be issued pursuant to paragraph (a) of this section if the Council determines that public hearings would aid in achieving the goals of the Economic Stabilization Program."

After companies, in accordance with the final regulations, submitted prenotifications for steel price increases, the Council on September 10 announced its special Rule I, in accordance with Subpart J.

The special regulations comprised in Rule I failed to distinguish specialty steel from steel in general, except that it did not grant specialty steel the one benefit which Rule I gives to steel in general-permission to increase prices on October 1 of flat-rolled steel products. In seeming contradiction of paragraph (a) of 150.220, the Council did not issue regulations concerning specialty flat-rolled; it extended the Rule by letters to prenotifying companies. In seeming contradiction of paragraph (b) of 150.220, the Council did not include specialty steel companies among those testifying at the hearing which the Council conducted on steel pricing.

Once Rule I was interpreted to suit the rule-maker, there was an almost total denial of opportunity for a price increase for makers of specialty steels. The published wording of Rule I in paragraph 3 eliminates the possibility of approval for price increases before January 1, 1974, on any steel product except flat-rolled. The unpublished amendment to Rule I eliminates the possibility of approval for price increases on specialty steel flat-rolled before January 1, 1974.

As a result, the Cost of Living Council has trapped the specialty steel industry in a six-month price freeze. The most recent authorization of increase under the Economic Stabilization Act occurred last June. The nearest prospect of a further increase is January 1 (without certainty of approval then).

The denial of ability to recover cost increases through price increases amounts to a six-month freeze on prices of all major specialty steel products. The effect is retroactive as well as immediate.

Mine is, I think, the only industry in the United States subjected to such a near-total freeze. This is blatant discrimination.

The treatment is also arbitrary, in that the Cost of Living Council has not publicly or privately explained or attempted to justify the singling out of one industry for extraordinary, repressive treatment.

The specialty steel industry differs in critical ways from the carbon steel industry. The specialty companies are comparatively small. They are labor intensive. Their steels are alloy steels, heat-resistant, corrosion-resistant-the stainless steels, tool steels, hi-speed steel, other alloy. The product has special elements which make them more costly per unit of weight than the familiar tonnage steels, and which require special skills in manpower required in production. The effort of the Cost of Living Council to treat the specialty steel industry as an undifferentiated part of the steel industry as a whole results now in specialty steel's being denied recovery of cost increases on 95 per cent of its product.

The gross inequity of it is that, as the Council's policy impinges on my com