a firm is allowed to recover the rising marginal cost, its profit per unit will necessarily increase. Therefore, on two accounts, Phase IV regulations militate against a firm increasing output in 1974.

In October 1971, Mr. Greenspan warned that earnings in the immediate past were too low to assure an adequate flow of capital into the canning industry. Yet the price control program established profit margin limitations based on the three fiscal years completed prior to August 15, 1971-without regard to whether that base period was representative for an industry or was at levels sufficient to ensure the availability of capital. The fact is that profit margins in the fruit and vegetable canning industry in those years were significantly below the industry average for the preceding 7 years. The predictable result is emerging. Real capital investment in new plant and equipment in the canning industry for the most recent three years for which data are available averaged 11 percent below the preceding three years.

In summary, during 30 months of price controls, with unending experimentation in the regulation of pricing, profits and revenues, we have seen the supply situation for canned foods change from one of abundance to shortage, and a deterioration of capital investment that even more seriously threatens the availability of canned foods in the longer run. Unless controls of canned food are terminated in the very near future-either by administrative action of the Cost of Living Council or legislative action of Congress-the prospects for any substantial mitigation of these difficulties are slight.

We urge that your Committee recommend against re-enactment or extension of the Economic Stabilization Act, and take any other appropriate step that would bring a speedy end to price controls in the canning industry. Thank you.

The CHAIRMAN. Mr. Hensley.

STATEMENT OF JAMES P. HENSLEY, DIRECTOR, LEGISLATIVE AND PUBLIC AFFAIRS, SHEET METAL AND AIR CONDITIONING CONTRACTORS' NATIONAL ASSOCIATION (SMACNA)

Mr. HENSLEY. On behalf of the Sheet Metal and Air Conditioning Contractors' National Association, we will file our present statement. The CHAIRMAN. Without objection, it is so ordered.

[Mr. Hensley's prepared statement on behalf of the Sheet Metal and Air Conditioning Contractors' National Association follows:]

PREPARED STATEMENT OF JAMES P. HENSLEY, DIRECTOR, LEGISLATIVE AND PUBLIC AFFAIRS OF THE SHEET METAL AND AIR CONDITIONING CONTRACTORS' NATIONAL ASSOCIATION (SMACNA) REGARDING EXTENSION OF THE ECONOMIC STABILIZATION ACT OF 1970 (AS AMENDED)

Good morning, Mr. Chairman.

I am James P. Hensley, Director of Legislative and Public Affairs for the Sheet Metal and Air Conditioning Contractors' National Association (SMACNA).

SMACNA is the national trade association of construction contractors engaged in the production and installation of heating, air conditioning, and ventilating systems plus a wide variety of specialty work, including industrial processing, architectural sheet metal, kitchen equipment manufacture, air pollution control and custom fabrication.

On behalf of the association I would like to testify in support of extending the discretionary Presidential powers contained in the Economic Stabilization Act of 1970 (as amended).

The construction industry-at least the organized portion of it-has had more experience with this nation's most recent economic controls program than any other segment of the economy. Since March 29, 1971, we have been under some form of wage and price controls as administered by the Construction Industry Stabilization Committee and various other Federal agencies under Phases I through IV. As a result, our industry is in a somewhat ideal position to assess the pros and cons of economic controls and their future directions.

Prior to March of 1971, our industry was in severe economic difficulty. Wages were escalating at a dizzying and irresponsible rate. Unproductive and

counter-productive work conditions were proliferating. Left unchecked, this trend would undoubtedly have resulted in an unprecedented increase in the rate of inflation, a drastic decline in building and rampant unemployment to boot.

Thankfully, our responsible national leaders—including many members of this body-recognized the crisis facing the construction industry and urged a reluctant President to exercise his authority under the Economic Stabilization Act of 1970 to restore a measure of responsibility to the economics of the construction industry.

The beneficial results are now history. Since March 29 three years ago, the average rate of first year settlements has declined from an average high of 18 percent to somewhat slightly less than 52 percent. At the same time we have experienced a dramatic decline in the number of economic strikes, and many areas have been able to shed themselves of uneconomic non-wage work practices. In short, we have "discovered" that labor and management can indeed bargain responsibly and recognize the very real economic demands and opportunities in the construction industry.

During this same three years of experience, however, we have recognized the inherent disadvantages too of a formal, government-administered controls program. We have recognized-as many national leaders apparently have that Federal economic controls are at best a temporary measure, that long term relief from unchecked inflation and spiraling prices can only result ultimately from the assumption of more responsible attitudes and relationships by labor and management counterparts throughout the industry. Perhaps one of the most salutary effects of our three-years of controls has been this realization and some degree of movement toward a less formal, voluntary controls arrangement within the industry.

At the same time, however, we have to realize that total, abrupt and formal decontrol at this time would be totally disastrous for the construction industry. Just the current speculation about decontrol and comments to that effect by national figures has paralyzed negotiations in many sections of the country. Negotiations that were proceeding smoothly have been brought to a complete halt as a result. The potential effect of summary decontrol on April 30-and discussion of the possibility-are particularly harmful to the sheet metal industry in particular. The vast majority of our labor contracts this year-probably 80%expire after April 30. Unless we receive some assurances of a continuing controls program, very little if any meaningful bargaining will take place before then. And, if the lid is lifted on that date, the "bargaining" that will take place will be that in name only. Tremendous pressures for unrealistic "catch-up” increases will be released, and the industry will be plunged back into the economic chaos of four years ago.

In summary, we feel quite strongly that some form of economic controls over the construction industry must continue beyond April 30 of this year. At the same time we would like to repeat the request that we made of this Committee on March 28 of last year. That the Committee also seriously consider recommending an extensive and responsible study of collective bargaining reform possibilities in the construction industry to be conducted during the period of extended controls. Such a study, we feel, would lay the important groundwork for accomplishing the meaningful revisions in the industry's collective bargaining relationships and practices that would render further continuation of economic controls unnecessary. Areas for such a study should at least include consideration of expanded area bargaining, multi-craft bargaining, common expirations dates and multi-employer certification.

We appreciate the Committee's consideration of our views and we will be most willing to answer any questions or provide additional information.

STATEMENTS OF GEORGE G. HAGEDORN, VICE PRESIDENT AND CHIEF ECONOMIST, NATIONAL ASSOCIATION OF MANUFACTURERS, AND DR. CARL H. MADDEN, CHIEF ECONOMIST, CHAMBER OF COMMERCE OF THE UNITED STATES

Mr. HAGEDORN. I would like to file a joint statement of Dr. Madden and myself, for your record at this time, but I would like to be heard orally by your committee.

The CHAIRMAN. You cannot do it tomorrow. We have a complete schedule for tomorrow. We will give you time subsequently and before the bill is passed on if you want it, in other words, to give you an opportunity to file an additional statement.

Mr. HAGEDORN. But not to be heard orally?

The CHAIRMAN. Of course, we would have to work that out. It depends upon what the schedule is. We have to work from day to day. I think if I were in your place, I would want to file now what you have. It will be printed in the record.

Mr. HAGEDORN. In any case, we would like to file our prepared statement right now.

[The joint prepared statement of Mr. Hagedorn and Dr. Madden on behalf of the National Association of Manufacturers and the Chamber of Commerce of the United States follows:]

JOINT PREPARED STATEMENt of George G. HAGEDORN, VICE PRESIDENT AND CHIEF ECONOMIST, NATIONAL ASSOCIATION OF MANUFACTURERS AND DR. CARL H. MADDEN, CHIEF ECONOMIST, CHAMBER OF COMMERCE OF THE UNITED STATES

TIME TO END CONTROLS

We appreciate the opportunity of testifying, on behalf of the National Association of Manufacturers and the Chamber of Commerce of the United States, before your Committee on this critical issue. The views we will express can, we are confident, be regarded as the virtually unanimous opinion of the American business community.

Our conclusion on wage and price controls may be summarized briefly : Not only are controls contrary to the principles of a free enterprise economy, they have in practice proved a total failure as a means of arresting inflation. Worse, they have been a counterproductive failure-controls have been a source of serious disruption in the production and distribution of goods and services. Controls are a leading cause of the widespread shortages of essential materials which have become a barrier to economic growth and prosperity and a source of continuing inflationary pressures. Controls block the action of natural economic forces which would bring about equilibrium between supply and demand and so restore price stability.

Since August, 1971, the nation has been through four phases of wage and price controls-five, if one includes the "midsummer freeze" of 1973. These have represented five different styles of administering the control authority granted by the Economic Stabilization Act of 1970. None of these five approaches has turned out to be successful or workable in any durable sense. Collectively, these five attempts to control the economy have led us into the present economic situationwith inflation rampant and channels of production and distribution seriously distorted.

With this record of five successive futile attempts to find the "right" way to administer wage and price controls, we do not think a realistic person can believe that a sixth try would lead to success. The fault lies, not with the way in which controls have been administered, but with the basic assumption that government intervention can lead to a better result than the free play of supply and demand in the marketplace.

Our legislative recommendation is, therefore, a simple one: Congress should not pass legislation which would authorize, after April 30 of this year, the continued existence of a government wage and price control program in any form or in any guise.

POST-CONTROL PROGRAM

In recent public discussion of the future of wage and price controls, there has been frequent mention of various forms of post-control intervention by government in the wage and price setting process. These proposals are, for the most part, vaguely defined and it is, therefore, impossible to analyze them in any precise fashion. In general, these post-control schemes seem to represent a continuation of controls under a different name and we oppose them for that

reason. Nevertheless, because these ideas seem to play a part in current thinking, we will offer specific comments on some of the most prominent suggestions.

1. Standby controls

If the existing legislation were extended, and the Executive Branch simply chose not to use it, we would have standby controls. We strongly advise against any such approach. It would itself be a source of inflation. Under standby controls, every seller (whether of goods or of services) would seek to keep his price as high as possible lest he be caught with a low price base when controls were reimposed.

Furthermore, the existence of standby control authority, even when it is not used, is disruptive of business confidence and a deterrent to business planning for expansion of its output. Certain industries in particular have had a sad experience with controls in the past year, and they will hesitate to go ahead with expansion plans while this threat hangs over them.

2. Wage-Price Review Board

The idea is that an official body would review specific wage and price changes and pronounce judgment as to whether or not they are in the public interest. Business finds such a proposal as objectionable as formal wage and price controls. It is, in effect, the enforcement of rules which are made up by the review board as it goes along. It creates the danger that private parties might be punished (by public obloquy, if in no other way) for actions that had not previously been defined as violations. It is hard to see how any semblance of due process could be preserved in the review board's proceedings.

3. Wage-price prenotification by large organizations

We see no indication, in the recent record, that such procedures would be helpful in curbing inflation. Inilation has clearly been the result of supplydemand developments throughout the world, rather than of misbehavior of individual business units. Prenotification would be a source of constant harassment and bureaucratic second-guessing of business decisions, rather than of protection against inflation.

4. Wage and price monitoring

Government already collects statistics on wages and prices and these are invaluable for economic analysis. We see no useful purpose in going further by continuous monitoring of wage and price changes occurring in individual firms. The only object in such monitoring would be to serve as a basis for sporadic arbitrary wage-price intervention by government. That, we feel, would be a source of continuous conflict, a severe reporting burden, and economic uncertainty.

RECENT EXPERIENCE WITH CONTROLS

The most striking fact about our recent experience with wage and price controls is that they have been a complete failure as protection against inflation. The second most striking fact is that controls are largely responsible for the wide-spread shortages of essential goods.

We trust that the failure of controls needs no extensive documentation. Consumer prices rose 9 percent in 1973-the largest increase in any year since 1947.

Some have argued that wage and price controls might have been more successful in curbing inflation in 1973, if only they had been administered in some different fashion. If only government had not abandoned the successful Phase II, it is argued, the price explosion of 1973 would have been avoided or mitigated. To this argument, one can only respond, "Not very likely." The world-wide demand-caused inflation of prices of basic materials in 1973 was not the kind of inflation that can be dealt with by price controls in the U.S.

But even if one were to concede that a different program for wage and price controls, which we might now design in retrospect, would have worked better in 1973, this is beside the point. Controls must always be administered by fallible human beings not gifted with perfect economic foresight. We must expect that they will always make the kind of mistakes that apparently were made in 1973 in administering controls. Ability to devise, by hindsight, a workable solution to last year's problems, is no guarantee of foresight in meeting next year's problems.

The existence of shortages of essential supplies and materials is also, we think, generally known. Here, however, some documentation is appropriate. The public may have the impression that the shortage problem is confined to a relatively few products. The truth is that shortages are widespread and exist in an astonishing variety of products-each of them essential in the operations of certain producers.

To document this, we offer, for your record the report on a recent Industry Survey on Wage and Price Controls conducted by the National Association of Manufacturers.

Among other questions posed to companies in the NAM survey, firms were asked to list materials and supplies which were in short supply as a result of wage and price controls. They further were asked to classify the products listed by the degree of difficulty in obtaining them, as "critical," "significant," or "moderate."

The list of products included just under the heading of those where shortages are critical is impressive in its breadth. Everything from aluminum to zine— and including such things as small electric motors, bond paper, stainless steel and screws and fasteners-appears on the list.

We have an unprecedented phenomenon in the American economy-peacetime shortages, on a wide scale, of materials essential for carrying on productive activ- | ities. This is a serious present threat to the economy's ability to provide jobs and goods and services. It is itself a cause of inflation, since shortages create irresistible price pressures. We believe that the nation's prosperity and stability during the coming year depend on a prompt and thorough removal of controls.

This is the first time the U.S. has applied wage and price controls in peacetime. It is, also, the first time it has experienced, in peacetime, widespread shortages of essential products.

The recent experience with controls has had one other effect. It has completely destroyed any ability of a control program for improving the psychological climate for price and wage stability.

In the early stages of the control program, one rationale for it was that, although controls admittedly did not deal with the underlying causes of inflation, they would curb the inflationary psychology which kept it going. Whatever validity this argument may once have had, it clearly has none now. After the experience of 1973, no one who might be inclined to fear further inflation would have his fears allayed by a wage-price control program.

THE REAL SOLUTION TO INFLATION

The inflation of the past year is not a unique or mysterious event. As always, inflation is the result of too much money chasing too few goods-this time on a worldwide scale.

We have not suddenly run up against the limitations on the productive capacity of this planet. Such limitations have always existed and, as population increases, we become more aware of them. But the present inflationary problem is not the result of inexorable supply limitations imposing a barrier where none existed before. It is the result of the tremendous increase in demand created by expansionary fiscal and monetary practices in the U.S. and other nations.

The cumulative deficit in the federal budget for the four years ending June 30, 1974, is estimated as over $60 billion. Money supply increased at a rate of over 8 percent in 1972 and 5 percent in 1973. Clearly, these financial policies were much too expansionary and we are paying the price in inflation.

The solution to the inflationary problem lies primarily in monetary and fiscal restraint. The growth of government outlays must be kept within more reasonable bounds, and expansion of money and credit must be held within the limits of the economy's ability to respond with increased output.

Even if the rest of the world does not follow the U.S. in a program of monetary and fiscal restraint, the resulting strengthening of the exchange rate of the dollar would help to insulate us from external inflation.

One of the most serious objections to a wage-price control program is that it encourages the false belief that inflation can be checked by some easier means than imposing restraint on government financial policies. It becomes a way of evading the hard necessity for curbing government spending and monetary expansion. It thus tends to preserve the underlying causes of inflation, while futilely trying to suppress its symptoms. This is an important reason for our opposition to wage and price controls.