Energy-related materials and equipment.--A further segment of the economy that will be subject to allocation should the Energy Emergency Act (S. 2589) be enacted into law as recommended in the conference report consists of "materials and equipment necessary for exploration, production, refining, and required transportation of energy supplies and for the construction and maintenance of energy facilities."/1 The pertinent section of the proposed Energy Emergency Act reads as follows: defined. (a) The Administrator shall, within 30 days It is not yet clear how broadly the covered industries will be The government stockpiles.--The federal government does of course maintain stockpiles of a broad variety of materials for national defense purposes. In April 1973, the President authorized the sale of $2 billion of materials from a total stockpile of $7 billion, stating that the government's supply of strategic goods could be reduced from $7 billion to $1 billion without endangering national security. As of year-end 1973, more than $900 million of the authorized $2 billion of materials had been sold. 1/ It should be recognized that the government currently is acting administratively to achieve certain of these goals. Recently, the President signed into law six bills authorizing the government to sell from its strategic stockpiles an additional $900 million (approximate) of materials including aluminum, copper, zinc, molybdenum, and silicon carbide. Since these are materials presently in short supply, the impact should be favorable as to availability and price. In general, with the exception of energy and energy-related industries and further limited sales from government stockpiles, relief for the civilian sector is not presently available through government allocations and priorities. Further, whether or not such allocation on the part of the government would be helpful if authorized is subject to debate. A Number of Solutions to a Complex Problem In the short run, the solutions to the materials shortages can be found in the problems that gave rise to them. As the economy retreats from the high levels of 1971-73 due to a combination of the until-lately restrictive monetary and fiscal policies and materials shortages, the demand-supply situation for materials will improve. This will, for example, be the case in domestic markets with respect to steel as the demands of the automobile industry fall off and steel becomes more available for the capital goods industries which are continuing to operate at high levels. Further, the unprecedented 100-percent-plus rate of increase in world market prices of raw materials is likely to be cut back sharply as production levels abroad fall off. As to capacity, the record capital expenditures of recent years will be felt in new and more modern plant and equipment. The adverse impact of price controls will be lessened as the controls are removed. In the case of manufacturing, the energy shortage is more of a problem as a source of raw materials than as a source of power. Since most manufacturing industries are not energy intensive and energy constitutes a relatively small part of the purchased material costs, price increases of even the present magnitudes can be handled without serious problems and, further, reductions of 10-15 percent of energy usage are quite often possible through conservation measures without affecting output adversely. Where industry is dependent upon products derived from petrochemicals, the answer lies in the removal of price controls and the assurance of adequate supplies of petroleum for industrial uses in order to avoid any major adverse impact on aggregate output and employment. Finally, the postponement and more gradual introduction of environmental controls are contributions that government can make. In sum, if price controls are removed, if industry is given a high priority in the energy programs, if the economy grows close to its normal rates of increase, and if conservation is widely practiced, we should be able to get through the problem of material shortages in the short run relatively unscathed. Any shortfall of these conditions would cause the situation to deteriorate. The longer-run problem may well be more serious. Abundance is no longer an assured way of life. As industrialization proceeds apace and population, incomes, and living standards rise around the world, the world demand for materials will rise strongly--possibly three, four, or five times present levels. Where the present base is large (e.g., the United States, the Soviet Union, and Western Europe) the impact of even a doubling of demand would be substantial in terms of both prices and availability. If prices are not to skyrocket (as contrasted with realistic pricing, which is essential) as projected demand curves push up against known resources, primary processing capacity must be expanded, materials in plentiful supply must be substituted for scarce resources, and there must be greater efficiency in usage. An obvious example is the change in market shares between small and large cars. Greater dependence on mass transportation will be still another result. Further, higher energy prices mean allocating a larger share of our national resources to the production and distribution of energy. As a result of such changes there will be significant adaptations in both personal and corporate life styles. Much has been done before along these lines with much weaker incentives. If we turn our ingenuity and determination to these problems, we can solve them. "Doomsday" is not at hand. Some Implications for Management Infla We now turn to some implications for management as we view them. Certainly in economic theory, and to a lesser extent in the business firm, "demand" has been "king" and "supply" has been taken for granted. With the advent of shortages, supply is the name of the game. It is not simply that it is a new game with the same rules, it is a different game. tion is likely to replace unemployment as the dominant economic problem. Material costs are gaining rapidly on labor costs. Conservation has achieved new respectability. As a result, machinery purchased will more closely match the functions to be performed. Manufacturing designs and methods will be aimed at reducing the use of raw materials and recycling those that are used. Methods of ordering and maintaining inventories will be changed to assure supplies. Vendors will drop products to simplify lines in order to maintain profit margins. Pricing policies will be adjusted to compensate for suppliers' policies of "prices in effect at time of shipment." Higher capital spending to increase our capacity in energy and other materials will impose large demands upon the financial system. In turn, pressures on long-term yields will make it unlikely that we will return to historical interest rate levels. luxuries. It will be necessary to differentiate between necessities and Mr. GETTYS. We are proceeding fairly rapidly. I believe we have on our list four more witnesses before we have interrogation by the members. For the remaining four, I do not want to cut you short, but I would appreciate very much your presenting your full statements for the record, and give as briefly as possible a summary to the committee, so that we may proceed with the interrogation. The next witness is Clarence Adamy, the president of the National Association of Food Chains. Mr. Adamy, we are delighted to have you. STATEMENT OF CLARENCE G. ADAMY, PRESIDENT, NATIONAL ASSOCIATION OF FOOD CHAINS Mr. ADAMY. Thank you, Mr. Chairman. I am Clarence G. Adamy, president of the National Association of Food Chains. On December 3, 1973, the board of directors of NAFC met in Washington and adopted a resolution with regard to its position on the extension of the Economic Stabilization Act. This resolution concluded that the National Association of Food Chains opposes extension of the Economic Stabilization Act beyond its present term. It should be noted at the outset that this is a substantial but understandable turnabout in the position of a great many NAFC members. Because of great concern about wage rate increases and the prospect of higher prices, the industry enthusiastically endorsed the economic stabilization program when it was first announced, actively supported its previous extension. As the program continued, however, it became increasingly clear that none of the assumptions which had led to its enthusiastic embrace were coming true. Wages for many continued to escalate; margins continued to narrow; the longtime decline in profits accelerated; food prices soared; and the industry continued to bear the brunt of public and governmental scrutiny. It should be quickly pointed out that this is not to be implied as an indictment of the regulatory system nor those who administer it. The fact is that we have simply seen another demonstration of the fact that wage and price controls, no matter how soundly conceived or competently administered, just do not work. This is a lesson that must, unfortunately, be relearned from time to time by businessmen as well as consumers and their leaders in Government. Hopefully, events of the current control period-and especially in 1973 in the food sector-will have helped in this relearning, at least for a time. It is extremely important to recognize that the economic stabilization program in effect since August of 1971 has not attempted to control raw agricultural product prices, nor has it attempted to control the prices of either exported or imported items. Except for very short periods in conjunction with the various freeze periods, increases in raw agricultural product prices and those of imported products have been permitted to be passed along through the distribution system to consumers. Additionally, both producers' and consumers' export sales prices have been uncontrolled. These provisions were not made out of sympathy for one segment of the economy over others, nor because of overriding political considerations. Rather they were the result of two important realities. One, because of the vast number of farmers, it is virtually impossible to enforce price ceilings at the farm level. Second, more important, the most recent food price surge has been the result of a short world supply of food in relation to world demand. Since there is nothing any single government can do to control either parts of this equation on a worldwide basis-assuming the need for continued world trade the only answer is to allow prices to domestic producers to reach a high enough level to induce increases in production. High prices are the solution to high prices, since they encourage additional production, just as low prices are the cure for low prices, since they discourage production. This is particularly true for food prices, as in 1973, when we saw the record high grain producing record or near-record crops. The result seems to be that, weather permitting, problems in these areas seem to be working themselves out, not because of controls but because of the lack of them allowing the free market to do its work. On the negative side, last fall and winter's jump in beef prices provides an excellent example of how controls completely disrupt a market without any offsetting compensation to consumers. What happened is described in detail in my full statement, which I will submit for the record. The point is, the economic stabilization program was not designed, and correctly so, to control farm or foreign market prices. Yet it is precisely these prices that caused the overwhelming increase in cost to U.S. food shoppers in 1973. Attempts to control such prices indirectly caused widespread dislocations and shortages, along with increasing consumer skepticism about the Government's ability toor even intention to-stabilize prices since they could not, in any sense, be perceived to be working. Thus, despite the most earnest. efforts of most dedicated and talented people, the economic stabilization program, in the food sector of the economy at least, did not work. No control program could have been devised that would have effectively mitigated the impact on food prices of the underlying supply and demand conditions for food prevailing in 1973. Just as wisely no effort was made under the economic stabilization program to control directly farm or export prices, the control program under which retailers and wholesalers operated in the past and are still operating under did not attempt to control directly retail or wholesale prices, again wisely. Wholesalers and retailers were given a marginal control system, not a price control system. This was a wise theoretical and administrative decision, yet the following charts indicate neither margins nor profits in the food distribution industry have been having the slightest impact on rising retail food prices, since both had been declining in the years prior to the stabilization program, and even if either a lack of controls or a reduced level of price competition had allowed profits to increase to the more normal levels of the midsixties, the impact on consumer prices would have been negligible. (The charts referred to may be found on pages 568-573.) This first chart shows what has happened to food chain gross margins, gross incomes, as a percent of sales. The important thing to note here is not the decline itself but that the general merchandise retailers in most recent years have experienced the exact opposite. |