remains unchanged.

The "guideline" is, on its face, superficial and almost self-contradictory; namely, that Phase II rulings provide a company with informative guidance, but have no legal substance. To make matters worse, nothing has been provided to take the place of these earlier holdings.

Profit control.--As a major aspect of the government's approach to controlling prices, the program has, since the start of Phase II, contained severe restrictions on profit margins. It will be recalled that in Phase III some relief was provided, but only minimal relief for many. The efficacy of the profit margin restraint approach is, we think, limited to a short-term type control program. This is because any selection of a base period inevitably disadvantages some. This is simply the nature of the base period concept. As it turns out, the base period was particularly bad for many firms in capital goods industries because they were suffering a business downturn--in some cases of the magnitude of a severe recession-during the years just prior to the advent of the freeze in 1971.

We urged, in Phase II, that there be recognition that the profit margin restraint rule should be modified if the program were to continue for any length of time. As we noted above, some relief was provided in Phase III, but as we go into the third year of the program, no further changes have been made. We think there must be recognition of the fact that such a restraint becomes more and more inequitable as the controls program is extended. In short, it would seem incumbent on the government, in terms of any standard of fairness, to provide relief, be it through an exceptions process or whatever. Obviously, the uncertainty as to availability of relief can totally distort a company's planning process and force it to make decisions which will not be in the best interest of the

economy as a whole. We have in mind the necessity for certain companies to drop product lines because they are not in a position to get price relief due to the profit restraint rule. This is an excellent example of the distortions and misallocations which flow from controls and we would hope that Congress, if it extends the statute once again, would certainly bear this in mind in terms of any directions given to the Cost of Living Council.

As a final comment on this problem of predictability, we believe there are procedural mechanisms which can be employed which would avoid much of the uncertainty that these control programs have created. We will turn to some of these mechanisms in our recommendations below.

Vague Standards

We, of course, recognize that the job of designing reasonable rules and regulations to govern wage and price behavior in an economy as complex as ours may, in the final analysis, be an impossible task. Clearly the Cost of Living Council understands the magnitude and difficulty of its responsibility. It certainly has underscored the need for broad rules,

flexibility in the system, and prompt decision making.

we are in the third year of controls and we still have a persistent and
Nonetheless, here
nagging problem of vague and undefined standards and rules.
like to cite a few examples.
We would
Under Phase II, a general problem area was
the pricing of long-term contracts, including government contracts.
effect, this critical problem area has never been dealt with in terms of
In
either an exemption or specific rules.
point, but it does appear to us that a period of more than two years is
We do not wish to belabor the
long enough to give any government agency ample opportunity to provide
guidance and equity in one form or another.

Wage control.--Nowhere is the evidence of vague standards better
illustrated than in the wage control portion of the program.
perhaps as many interpretations of what the current wage standard is as
There are
there are people of whom you can ask the question.
is that the 5.5 percent standard is apparently designed to mean one thing
All that can be said
in the collective bargaining situation, another for the non-unionized
members of the labor force, and, with the issuance of at least proposed
rules, quite another for top executives in industry.
stand why we have a vague standard governing wages.
We think we under-
designed to establish a control which will not distort or overly restrict
It is undoubtedly
the general upward movement of wages and salaries.
never been admitted officially.

Yet, in fact, this has
Since January 10, 1973, there seems to be

a deliberate pattern of silence on the part of government with regard to
the intent of the vague standard.
tion of this vague standard, but we do believe that it is incumbent upon
We are not, per se, against the promulga-
government to at least provide the rationale and to ensure that what is
vague for one is vague for all.
minimum standard of fairness.
No other approach can possibly achieve a

Lack of Communication

We turn now to the problem of lack of communication.
above, during Phase II over 500 rulings were published to explain complex
As noted
rules governing wages and prices.
no such rulings have been issued--or, at least, rulings of a comparable
As was also noted, since Phase IV started,
nature. It now appears that the principal approach to the interpretation
of the complex Phase IV rules is to be a combination of questions and answers
issued by the Council in a press release format and informal verbal ex-
changes between a member of the public and a member of the staff of one of
the layers of the program's administration. We recognize that an effort

is being made by these means to provide consistency in such interpretation
and that thousands of questions have been answered and, in some cases,
promptly so. However, from the point of view of procedural fairness, the
approach adopted in Phase IV falls far short of the minimum requirements.
Any program, and particularly one which is designed to perform the diffi-
cult task assigned to the controls program, must build in a network of
communication techniques to make available adequate knowledge of the regula-
The techniques are not new to government and, as a matter of fact,

tions.

E

-

Ho.

are almost universally utilized in major ongoing federal programs. include the following, among others:

They

An administrative framework which builds on past

experience.

Unfortunately, while the Cost of Living Council pays "lip service" to providing the equivalent of the items noted above, in any important sense, these communications are absent. For example, as noted above, no rulings have been formally published and the status in terms of a legal defense of the "questions and answers" lists has never been made clear. While public hearings have been held regarding individual company or industry price increase requests, they have not been held with regard to rule making and, if we read the General Counsel's statements correctly, it is not intended that this approach will ever be utilized in the development of regulations.

Since Phase IV began, the Council has made public its actions on only a handful of exception requests. The public was told that, as one of the fundamental policies of Phase IV, a more viable exceptions program would be instituted because we were going into a "toughened" control period. Hopefully, this will eventuate, but we have no evidence that this is the case. Parallel to exceptions and exemptions is the concept of decontrol. Decontrol has, of course, been stressed as the end result of Phase IV. However, to our knowledge, the Council has not given even minimum consideration to an approach, criteria, or technique for accomplishing this announced goal.

As to a viable administrative framework, the government abandoned the approach set up in Phase II in favor of a new approach. We have reference to the decision to extend new authority and responsibility to the IRS for the operation of Phase IV. Obviously, this satisfies certain cost restraints--self-imposed or otherwise--of the government and has superficial respectability in the sense that the IRS has had a role to play in the administration of controls since the outset of the program in August 1971. However, what is unstated, but obviously could not be overlooked, is that, first, the Price Commission during Phase II established an internal system of price control which, by January 10, 1973, was operating in a relatively efficient fashion. Many government price analysts had survived the learning curve and were operating in the fashion of experienced officials. If we read the General Counsel's statement clearly, we are told two days' training is all the background an IRS price analyst needs to effectively make

decisions regarding a company's request for a price increase. This obviously cannot be the case. Second, as recognized by the Council, the delegation of authority and responsibility in the magnitude given to IRS under Phase IV brings with it the obvious problem of inconsistent interpretation. No doubt the Council is aware of this problem and is working to minimize this result. Nonetheless, being forewarned and aware of the problem should have led the Council to adopt a system which, at least procedurally, did not build in this element of risk. In short, since the government must have known it could not avoid inconsistent interpretations as a result of delegating additional authority and responsibility to the IRS, it should have sought an alternative mechanism.

Recommendations

The ideal solution of the problems we have enumerated in this statement would be a return to a free economy. As we mentioned at the outset of this statement, it is simply ironic that the capital goods industries have been controlled for so long since the industries making up the capital goods sector of the economy do not contribute to inflation and, in fact, produce the type of equipment that is necessary for increased productivity and output. Hopefully, when this Committee completes its study, it will have noted misallocations and dislocations sufficient to warrant a congressionally mandated return to a free economy.

Barring an immediate return to a free economy, we think as the purpose of these hearings suggests, steps must be taken by the Administration to offset the distortions this program is currently creating. One obvious approach would be a viable exceptions process where speedy and adequate relief can be provided. We have in mind the necessity for an exceptions process which recognizes inequities and hardships without forcing a company to be bankrupt or a critical supply shortage to be upon us before relief is provided. One of the problems we see as controls wear on is that the program is likely to create critical supply shortages in certain areas three or four years down the road because of some of the decisions forced upon companies today. It is to this kind of long-run problem that an exceptions process must be addressed.

Again, we appreciate the opportunity to present our views to this Committee and request that this statement be included in the record of the hearings. We think this Committee's inquiry is an essential one and hope that if we can provide further assistance, you will call on us.

Respectfully,

Charles Stewart

President

M

API

BUSINESS CAPITAL FORMATION

-PUTTING IT IN PERSPECTIVE
(1925-1970)

MACHINERY & ALLIED PRODUCTS INSTITUTE AND ITS AFFILIATED ORGANIZATION, COUNCIL FOR TECHNOLOGICAL ADVANCEMENT
ARE ENGAGED IN RESEARCH IN THE ECONOMICS OF CAPITAL GOODS. (THE FACILITIES OF PRODUCTION, DISTRIBUTION, TRANSPORTATION
COMMUNICATION AND COMMERCE), IN ADVANCING THE TECHNOLOGY AND FURTHERING THE ECONOMIC PROGRESS OF THE UNITED STATES