THE COST OF CONTROLS TO BUSINESS

A-108

Several independent studies, two by the Battelle Columbus Laboratories (one of large Tier I industrials in the top 125 of the Fortune Double 500 and the other of smaller Tier I industrials in the 125-781 range of the Fortune ranking), one by the National Association of Manufacturers (NAM), and one by the IPS Industry Monitors have been made to ascertain the administrative costs to business of complying with the Economic Stabilization Program. The results may be summarized as follows:

(Westinghouse has reported in a letter to the Council a cost per prenotification of $10,000)

Cost per Exception Request $7,711

The responses to the Battelle survey reflected a
large range of estimated costs, and should, there-
fore, be quoted with caution.

*Obtained by multiplying Annual Incremental Cost figures
by CLC records of the number of businesses in each
category. The results should be viewed with caution
because they are heavily weighted in favor of

industrial firms.

Cost of Living Council
January, 1974

APPENDIX Q

ECONOMIC DISTORTIONS INDUCED BY PRICE CONTROLS

A-110

The Problem

Price controls, by their very nature, are intended to cause distortions in the normal price mechanism, by limiting the prices that vendors might otherwise charge for their goods and services. However, during the past several months there have been increasing allegations that price controls are inducing distortions into the economy that were not intended as part of the Economic Stabilization Program. In particular, it has been alleged that price controls have caused shortages and changed traditional business practices by:

- distorting import-export patterns,

- causing products to be withheld from the marketplace,
discouraging corporate capital investment,

- forcing companies to alter product line mixes.

While it is clear that certain changes have taken place in these areas during the recent period of price controls, the actual impact of price controls is very difficult to measure. Many other economic forces have been at work simultaneously: an unprecedented surge in domestic and foreign demand, causing the economy to operate at full capacity, the energy crisis, shortages and changes in relative prices of raw materials, and devaluation of the dollar, to cite a few. Price controls have definitely contributed in some cases, but the problem is to sort out how much of an effect they have had in the larger economic context.

Summary of Conclusions

An analysis of the complaints of distortion in all industries except petroleum that have been received by the Cost of Living Council in 1973 from both private and public officials shows that:

Some distortions were clearly due to controls, and
their severity depended on the degree of price re-
straint imposed.

Exports of copper and copper scrap surged in June
and July during the Freeze, and returned to normal
levels after controls were relaxed.

A-111

Beef was withheld from market as a result of the
ceiling on beef prices.

A shift from light-weight to heavier-weight printing
papers appears to be due in part to controls.

Other alleged distortions do not appear to have been
caused by controls.

Corporate investment is increasing, and has formed a
pattern, with or without controls and regardless of
program changes.

- Product mix changes in steel, textiles and newsprint have been due primarily to factors other than controls. The examples cited below have been chosen because they are particularly illustrative.

ALLEGED DISTORTIONS

PROVEN

Shift to Exports - Copper and Copper Scrap

Perhaps the best example of shifts in export patterns is refined copper and copper scrap. Chart 1 shows that in 1973 copper scrap exports were increasing at a fairly consistent rate until the Freeze was announced. The freeze of domestic prices, when world prices were soaring, caused a surge of exports in July.

After copper scrap was exempted from controls (July 19th), domestic prices increased and the flow of exports slowed to roughly the pre-Freeze rate.