held down, why should not profit rates. The answer is that they should not be held down. The spokesman was Senator William Proxmire in the Congressional Record on November 16, 1971. When this administration reached the stage of decontrol it followed what is called sectoral decontrol, and that means that you take small bites out of the control system and decontrol. This has resulted in an aggravation of already existing shortages. It has created massive inequities. For example, only recently have manufacturers of forgings been decontrolled. These companies went for months buying at extremely increased prices the raw materials which go into the manufacture of forgings. So that the decontrol of the raw materials created a tremendous and very visible inequity for the users of those raw materials in the manufacture of forgings. The COLC finally realized that this was something that had to be taken care of and forging manufacturers were decontrolled. There is another inherent irony in the system of controls that we have been employing. As soon as the control mechanism causes a shortage let us take lumber for example, or fertilizer-and even though the decontrol of those two categories, which has taken place, would produce a significant price increase, the COLC was compelled to decontrol them because of a shortage in the material. So one may say properly that those parts of the economy which are most explosive and where there are shortages present in the products that they produce have been progressively decontrolled while the "white hat boys" that do not have this kind of a price increase potential still remain under control. So what you really do is, if you want to create the best case for decontrol is you create a shortage, and you really do not need much help in creating a shortage, because the system is creating a shortage. There has been almost a complete lack of equity and treatment of hardship in this system of controls, partly due to the fact that I mentioned earlier, namely that the decision was made not to create a massive bureaucracy. That is why you get a problem like the one that has been underlined this morning, and you just cannot operate a system of control in the manner in which this one has been administered. To repeat, the paradox is that when the shortages occur, and they are acute, and even though there is a potential bulge in price increases when the decontrol process takes place, the item is decontrolled and the people that are not in that position are kept under control. In any system of controls, or even the excess profits tax, where you have a base period, you are going to have terrific inequities and hardships. There has been no real system set up under the present control mechanism to deal with those inequities and hardships. Many capital goods companies were in recession during the period of the base period and that, combined with some other special characteristics, has produced a tremendous inequity as far as the capital goods industries are concerned. That is spelled out in our written statement. Yet we have not been able thus far to attract the attention of the COLC away from these explosive shortage areas. There is a serious consequence that attaches to any standby type of controls. So we recommend not only that you scrub what is on the 30-463 O-74-34 books now but that you not substitute a standby mechanism, because the natural human thing to do is to try to beat the game. If you can get a price increase in the market, for fear the controls may be reimposed, you take it, where you might otherwise not take it. I have confidence that if the Congress feels that they want new legislation for controls after the current legislation expires or is repealed before April 30 that it can act expeditiously without standby controls. We have in this country at the present time-and this is part of what Mr. Stein was trying to say, and this is my concluding comment-a growing shortage of capital formation which will plague this country in terms of economic growth for the next decade unless we correct it. We are not going to make any contribution toward correcting it unless we return the economy to the free market system. That is a prerequisite to enabling business, together with the other parts of the economy, to increase capital formation so that we may keep modern our facilities, so that the country will be able to compete internationally and so on. Now, I should repeat, our position is that, at least by April 30 if not before, scrub the entire control system. It has not worked. It has created shortages; it has created distortions; and substitute for it nothing. We do not want standby controls. The country should not want them. We recommend also that what I have described as a mini-Galbraithian system of oversight and monitoring of the economy that is in the administration's bill should be rejected by this committee and by the Congress. I have three supplemental pieces which, if they are too long from the standpoint of the record, we suggest that the staff might be interested in going over them. If they are not too long, we submit them for the record. One is entitled "Business Capital Formation"; the other is called Inflation and Profits. The final item is a discussion of materials and other shortages in industry. It is always a privilege for me to appear before this committee, and I welcome the opportunity to say to Mrs. Boggs that I was ope of the many admirers of your deceased husband. Thank you very much. Mr. GETTYS. Thank you very much, Mr. Stewart. Your supplements will be accepted for inclusion in the record. Thank you very much. [Mr. Stewart's prepared statement with attachments: a letter to Senator Charles McC. Mathias, dated October 17, 1973; a study entitled, "Business Capital Formation-Putting it in Perspective (19251970)," memorandums entitled, "Inflation and Profits," and "Materials and Other Shortages in Industry," follows:] Prepared Statement of the Machinery and Allied Products Institute Charles W. Stewart, President House Committee on Banking and Currency in Hearings on the Future of Wage and Price Controls We appreciate this opportunity to appear before the Committee to provide our views regarding the extension of the Economic Stabilization Act of 1970, as amended--in short, the future of wage and price controls./1 As you know, the Machinery and Allied Products Institute is the national spokesman for capital goods and allied equipment manufacturers. Our member companies are strong supporters of the goals of stabilization and have, even in the face of substantial burdens, made an extraordinary effort to comply with the requirements of the five phases of controls imposed upon the economy since August 1971. At this time, our membership is of one mind. It is time to return the economy to a competitive enterprise system. We urge the Committee to recommend the earliest possible repeal of the Economic Stabilization Act of 1970, as amended. The reasons for this view are many and include the special purpose and limited effectiveness of a controls program, the need to eliminate the energy and raw materials shortages hobbling our economy, and the special plight of the capital goods producer. Further, we do not believe the Administration has made a persuasive argument for what bears the earmark of Phase V of the controls program. We begin with the issue of immediate decontrol. Need for Immediate Decontrol Special purpose tool. --We trust that all will agree with the Administration's conclusion that: Controls are a special purpose and limited tool to constrain inflation, rather than a general purpose There 1/ At the time this statement is being prepared the bill which we understand has been introduced by Chairman Patman is not available. fore, we are unable to comment on its provisions. watched carefully. This problem becomes more serious We know of no one who would argue with the basic premise that controls cannot provide a long-run solution to the problem of economic stability. Congress has recognized this fact of economic life at each extension of the basic statute. The Administration endorsed this conclusion each time it instituted one of the five phases of controls. In no democratic nation has a comprehensive program of direct wage and price controls been maintained over a long period of time. On the contrary, the programs have soon been undermined by a loss of effectiveness--if indeed any measurable effectiveness were achieved--and loss of public confidence. Controls for anything beyond the short term are repugnant to organized labor for all the obvious reasons; unwanted by business because of the burdens and costs flowing from economic inefficiency which outweigh any benefits; and illusory to the consumer-public which wants price stability but appears to be unaware--at least until too late--that such mechanisms provide little tangible benefits except perhaps in the very short run. In sum, in the long run they are not in the public interest. The controls program should be terminated completely before its impact not only on economic policy, but on other values as well, becomes permanent and all-pervasive. Moreover, we do not favor any form of standby controls. The wrong economic medicine is being applied.--Companion to the proposition that controls are at best of short-lived usefulness is the equally obvious economic conclusion that controls cannot work at all in certain economic climates. This caution flag was waved in Congress last year during consideration of the extension of controls. The view was expressed time and again that the controls could not work in a demand-pul inflation situation. As we all now know, the year 1973 saw rapid inflation unmatched since the outbreak of the Korean War. We agree that much can be said as to the "unusual" character of this past year including, for example, the worldwide inflation, materials shortages, changes in exchange rates, and energy crisis. However, even absent these influences which aggravated our domestic inflation, there was little hope at the outset of the year that controls would be able to hold down the rate of inflation. While almost all categories of goods experienced price rises during the year, the largest jumps were registered by food, which rose by 20 percent, and fuels, which increased by 44 percent. Further, during 1973 food prices accounted for 51 percent of the total rise of consumer price, and energy prices accounted for another 11 percent. In the case of both food and fuel, the forces exerting pressure on prices were obviously outside the reach of the government controllers. The government itself recognized, at least in part, the futility of applying the controls in place in 1973 by decontrolling certain sectors of industry on a narrow, selective basis. As we all know, the numerous and significant shortages forced government to decontrol selected industries, e.g., copper scrap, fertilizer, and nonferrous metals. At first blush, such selective decontrol actions might lead one to conclude that by tinkering with and adjusting the program, regulatory machinery can be made more effective. This, however, is not the case; the decontrol actions put in proper perspective underline the inherent weakness of controls as a long-run tool. The industries relieved by government action experienced "horror" stories for the most part. Those still severely disadvantaged by controls have in fact had their problems aggravated by such tinkering because of the intricate interrelationships and sensitivity of the various sectors of the economy. We think it necessary that the magnitude and importance of these problem areas be understood and we turn now to the shortages problem in particular. Shortages Are Hobbling the Economy The Institute has attempted to determine the magnitude of the shortages problem by means of a survey of a representative group of member company officials. We think the findings of the survey underscore in dramatic fashion not only the critical nature of the shortages problem, but also the perversity of the current controls program as a significant causal factor of these shortages. The key findings of our survey results are as follows: 1. The overwhelming majority of respondents to the |