we must expand our capacity to produce electricity generated by the clean application of coal and by nuclear fuel. All of this will require tremendous investment of capital in new plant and equipment and in research and development. Price controls discourage such investment.

In many industries other than electric utilities, it is obvious that today's controlled prices would not provide a high-enough return on investment to justify essential capital expenditures. It has been calculated that in the steel industry, as just one example, the building of a fully integrated mill would require total capital outlays of some $550 for every ton of annual capacity. But under the prices allowed, the yearly profit would be around $15 a ton-equal to a return of only 3 percent on the capital invested. That is not enough to attract capital that can earn a much higher return elsewhere.

Much of the plant expansion going on today in such industries as steel, aluminum, rubber, paper and cement is of the "incremental" type-installing a new machine here, upgrading an old process there. Not enough major new plants are being started. I hope this will change. It must change. But it will take the removal of price controls to change it.

Gentlemen, we are all after the same thing here. We are trying to arrange our economy so everybody can get the most for his dollar; so that we can be most productive in producing goods and services; so that the consumer and the people living on pensions and fixed incomes don't suffer from the ravages of inflation. I am certainly for all of that.

But we should learn from history. And history shows that competition and not price controls is what has given the American consumer and the American producer the most for his dollar in the past. And this has brought supply and demand together to provide the highest standard of living in the world.

Without price controls, here is how the consumer has benefitted from the operations of my industry:

Refrigerators-The price per cubic foot has gone down 65 percent sine 1952. Washing machines-The price per pound of wash has gone down 56 percent since 1952.

Fluorescent lamps-The price per lumen of light has gone down 14 percent since 1947.

Room air conditioners-The price per BTU has gone down 25 percent since 1958.

Without price controls, here is how businessmen and also the ultimate consumer has benefitted from operations of this industry:

Medium-sized AC Motors-The price per horsepower has gone down 40 percent

since 1963.

Steel Mill Drives and Controls-The price per ton of annual capacity has gone down 60 percent since 1958.

Of course, not every product we make has gone down in price.

Watthour meters, like the one on your house-The price there has increased but only 2 and one-half percent and for a better product that has a life of 30 years. This has been possible because of competition and productivity improvement, not because of regulated pricing.

I've found that during price control, managers tend to pay more attention to the price they can justify by pointing to high costs than they do to the job of reducing costs... that kills the incentive for any productivity improvement. Just administering this cost justification process adds greatly to our costs. We estimate that it has cost Westinghouse more than a million dollars to carry out this process thus far. And the cost of "opportunities lost" by the managerial talent tied up in this burdensome process is probably much more.

I am not urging the end of price controls because Westinghouse needs special relief to increase its prices-although if controls are continued we will have some serious problems in this regard. I am urging the end of price controls to free the market to move naturally in response to demand and supply pressures—a mechanism that not only assures production of things needed by the consumer, but also helps fight inflation over the long pull.

Gentlemen, I appreciate this opportunity to give you my views.

STATEMENT BY WILLIAM J. DE LANCEY, PRESIDENT OF REPUBLIC STEEL CORP. Republic Steel welcomes the opportunity to express its views to the Congress on the question of extending the Economic Stabilization Act.

In 1971, when wage and price controls went into effect, we recognized even then that when demand began to push or exceed capacity serious shortages and economic distortions would be an unavoidable consequence of continued controls. These conditions are now upon us, and it is of no little significance that despite the continuation of controls inflation in 1973 was the highest in 22 years. Unless the free workings of the marketplace are permitted to have a chance of balancing supplies with demand, we see little possibility of the nation attaining its goal of checking inflation.

We therefore believe the time is clearly at hand for the Federal government to proceed with the prompt abandonment of wage and price controls. If this does not occur, we believe the certain continuation of shortages and resulting economic hardships will undermine public confidence and, in all likelihood, produce sweeping political repercussions. Indeed, it is probable that continued shortages will prove to be more politically destructive than decontrolling wages and prices.

Understandably, our position on this matter is influenced heavily by what we see happening to Republic and to the steel industry generally. However, the widespread shortages and distortions that have developed in other sectors of the economy and the government's current efforts to ameliorate them through selective decontrol-indicate that the disruptive effects of continued controls are by no means confined to steel.

It appears, however, that in the government's mind, a special problem arises in connection with steel prices. Steel, we are told, is a bellwether in the economy and therefore steel price increases tend to have a "pervasive" influence on the prices charged by the almost countless manufacturers who use steel in the production of their products.

We believe steel's identity as a bellwether with respect to industrial prices is greatly overdrawn. In the first place, as we have pointed out to the Cost of Living Council, long-term trends indicate that the steel industry's total revenues have constituted a decreasing percentage of Gross National Product and in 1972 stood at 1.9 per cent. We further pointed out that moderate price increases in steel would boost the wholesale price index for industrial commodities by only a fraction of a point.

In the second place, the cost of steel constitutes a declining percentage of the total cost confronting manufacturers in the production of their end products. In other words, their costs for labor, taxes, debt retirement, and other supplies and services have risen faster than their unit costs for steel. Moreover, in our pleas to the Cost of Living Council for a measure of price relief from our own sharply rising costs, we have furnished statistics indicating, for example, that our request last autumn for a 4.7 per cent improvement in the average price for flat-rolled steels would increase the materials cost of the average automobile by $11.88; a 15-cubic foot refrigerator by $0.56; an automatic clothes washer by $0.64; and a single family ranch home by $13.31. Relative to the total costs of producing the items, these numbers were insignificant. But to the financial health of flat-rolled steelmakers, this price increase was crucially important, especially since it represented only a partial pass-through of added costs incurred in the production of such steel.

The Cost of Living Council did not contest the cost justification of the requested steel price increase. But by choosing to defer half of the increase until January 1 of this year. the Council's action suggests to us that it was more persuaded by the need from political and public relations considerations to defer cost recoveries by the steel industry than it was by considerations of equity or by the obvious need for the nation's steelmakers to have a realistic chance of generating the kind of capital required to expand capacity, replace obsolete facilities and cope with massive environmental demands.

The validity of our interpretation has been underscored by the Council's more recent decision dated January 25 of this year. In that decision which applied to prenotified price increases on a variety of steel mill products-including steels needed by the oil and gas industry-the Council:

(a) denied steelmakers price adjustments that fully reflect the straight passthrough of added costs already incurred in the production of the products involved

(b) rejected for an indeterminate period any further efforts on our part to recover added costs through improved prices

(c) exempted from price controls some steelmakers of certain steel mill products, including those required by energy-producing industries, while keeping a price lid on other producers of the same kind of products, including Republic.

Aside from the obvious continued inequities emanating from this most recent decision, we believe it practically guarantees continued shortage of steels needed to help alleviate the energy problem.

The controls program has had an unusually severe impact upon the steel industry. The inception of wage and price controls in 1971 came upon the heels of a very costly labor contract that had just been consummated. Our efforts to offset the higher employment costs inposed by this contract on most of our products were caught in the initial freeze and it was not until months later that we could put into effect on future orders price adjustments that reflected these higher employment costs.

But even more importantly, the beginning of controls found the steel companies under a longstanding condition of price deficiencies caused by years of government jawboning and also by several years of highly opportunistic pricing on the part of foreign steelmakers determined to enlarge their share of our domestic market, regardless of cost. Since steel price increases permitted by the Cost of Living Council represented nothing more than cost justified improvements from previously depressed prices, steel companies have never been able under the controls program to realize prices that bore a relationship to our capital needs or to the normal workings of the marketplace. Moreover, the shift from Phases II and III to Phase IV brought a change in rulings which, in effect, denied Republic and other steelmakers an opportunity to reflect in their prices added costs incurred in late 1971 and in almost all of 1972. The annual revenue loss to Republic of this shift in the Cost of Living Council's rules amounts to $100 million.

Controls have worked adversely upon the steel industry in still other ways, including the squeezing of some of our raw material supplies and greatly increasing their costs to us. Because of the provision that firms employing 60 employees or less are exempt from controls, some 70 percent of the steel scrap sold commercially in this country was uncontrolled even before the recent decontrol of all ferrous scrap. Hence, the heavy demand over the past 12 to 15 months for steel scrap at home, coupled with simultaneously heavy exports to producers abroad, has led to astronomical increases in scrap prices. In 1972, the average price for steel scrap purchased by Republic was $37 a gross ton. By the last quarter of 1973, this had risen to $72 a gross ton; and for certain grades, recent prices have soared to as high as $140 a ton. This is an extremely ominous trend. The recent total decontrol of scrap prices, together with continued controls on steel, carries the distinct threat of making our continued output of certain steel products-including seamless pipe and tubing used by the petroleum industry-economically intolerable. Should this occur, the resulting shutdown of production facilities would aggravate steel shortages and force substantial layoffs among our employees.

The situation with respect to coal has become equally serious. The absence of price controls on coal sold abroad and coal sold to public utilities under long-term contracts has resulted in mounting exports of coal to users abroad and increased purchases of coal by utilities, thus creating a serious and growing shortage of metallurgical quality coal indispensable to the production of steel. As a result, just a few weeks ago, one of the nation's largest steelmakers reported that it was reducing its steel output by at least one million tons over the next six months solely because of the coal shortage. Meanwhile, Republic-and we suspect, other steelmakers as well-are struggling on the razor's edge with greatly reduced supplies of coal in our plant stockpiles. Here is an instance where a combination of price controls plus ultra-stringent regulations with respect to mine safety that have reduced coal output plus environmental pressures that are diverting high quality fuels from conventional needs to functions that could be otherwise served are all working together to create what threatens to become a serious steel shortage. There is still another ominous development emerging-one that has adverse ramifications both for the battle against inflation and for efforts to assure this nation with an adequate supply of steel. As a consequence of the increasing distortion in steel's cost/price relationships, domestic producers are being compelled to give serious consideration to committing larger proportions of their steel output to export sales. Available data indicate that there was a significant increase in steel export volume during the last half of 1973-from 3.5 percent of total industry shipments in the third quarter to 4.4 percent during the fourth quarter. There is little doubt this trend is continuing in the current quarter in view of the substantially higher prices available in the export market. There is also little doubt that growing tonnages of steel required by the oil and gas industry are involved in this export activity.

The increasing shortfall in domestic supply resulting from growing steel exports

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would, of course, be made up by greater import volume to whatever extent available. However, steel imports now command premiums of from 15 percent to 40 percent above domestic price levels. Thus, if domestic producers are compelled to turn to foreign markets and domestic consumers are compelled to turn increasingly to foreign supplies, there will be a substantially greater inflationary impact in the domestic economy. Equally as disturbing, if domestic steel consumers are unable to obtain steel from domestic or import sources, jobs will be sacrificed and increased shortages in consumer items can be anticipated.

The nation can ill afford such distortions with steel industry economics. If the steel industry must carry the burden of an economic bellwether when it comes to price, it is entitled to the same kind of eminence when it calls for an opportunity to achieve a financial status that will enable it to serve the nation's future needs. Regardless of who or what is to blame for the energy crisis currently gripping this country, if we have not learned from this experience the crucial importance to the nation of viable basic industries, the future is indeed bleak. Steel is truly one of the most basic of industries in our economy. If we lack either the means or the incentive to adequately invest in this industry in the years ahead, the concerns now being expressed by the government over sufficient supplies of steel for the energy industries will soon spread to similar concern for the needs of steelconsuming industries throughout the economy.

There are indeed signs that this could occur. Competent authorities both within and outside the steel industry predict that by 1980 the industry will require an additional 25 million to 30 million tons of annual steelmaking capacity to fulfill the nation's needs, in addition to the replacement of some 25 million tons of existing capacity.

Even at today's figures, the cost of building new capacity can run between $250 and $500 per annual ton, depending upon whether or not it can be fitted into existing plants or requires totally new sites. Add to that the tremendous sums required to replace or modernize existing obsolescent equipment; and then, add the huge and growing sums required to meet environmental control regulationsand you find that the industry is confronted with an annual capital expenditure requirement of at least $3.5 billion for the remainder of this decade.

There is no way expenditures of this magnitude can be financed without a substantial widening of steel profit margins. In the four years prior to 1973, the steel industry's total cash flow averaged only $1.8 billion a year, and long-term debt grew to an all-time high of approximately 40 per cent of stockholders' equity. Even the boom year, 1973, found the industry with a cash flow $1.2 billion short of the $3.5 billion required for new capital investments in the years ahead. For at least a dozen years, steel's profitability has ranked at or near the bottom of the list of the nation's 40 leading manufacturing industries—a fact not lost upon the investment community, which has stood by unimpressed and untempted by the decline in the market value of steel stocks to a fraction of their book value.

And neither the public nor the government should be misled by recent headlines touting the dramatic improvement in steel's earnings in 1973. Such improvement came upon the heels of practically depression-level earnings in 1971 and mediocre results in 1972. Republic's own experience illustrates the point. After earnings that were practically zero in 1971 on $1.4 billion of sales and which improved to a level of only 4.2 per cent on stockholders' equity in the good volume year 1972, Republic Steel's earnings in the absolutely boom year 1973 amounted to:

(a) Only our 3rd highest in total dollars.

(b) Our 25th highest as a per cent to sales,

(c) Our 13th highest as a return on stockholders' equity.

It must be remembered that these results were achieved on all-time record production and shipments and on sales that were almost $500 million higher than those of the previous record year, 1972. Factored against the capital needs that lie ahead of us, they remain painfully disappointing. It is small wonder, therefore, that practically all major steel companies are reported to be aggressively pursuing diversification opportunities. We can assure you this is true of Republic, and it is not without significance that just a few weeks ago one of the industry's better earners reported that 35 per cent of its revenues are now coming from non-steel

sources.

The inability of the industry to expand capacity can hardly be considered as being in the best long-term interests of this country. But steel companies, like others, have an obligation to their stockholders and their employees to function as viable concerns. This mandates that they seek to make the most prudent use of resources.

We well understand and sympathize with the government's concern over continued inflation. We share that concern, not only because of the overwhelming evidence that the steel industry has become a victim of inflation but because continued inflation undermines national confidence and seriously impairs orderly planning for the future. But there can be little question now but what controls have become counter-productive and are stultifying the normal economic adjustments needed to bring supplies into balance with demand.

It is time that the dynamics of an uncontrolled economy be permitted to make the needed adjustments. It would perhaps be naive to assume that decontrol would not be followed by a short-term period of catchup efforts-to the extent that the market will support them-on the part of industries for whom the controls program has had a punishing impact. But the longer the nation postpones the opportunity for the free workings of the marketplace to make lasting adjustments, the more certain it is that we will continue to be afflicted with shortages and distortions that undermine public confidence and retard economic progress. The longer controls are continued, the more intensive and more prolonged will be catchup efforts by industries severely handicapped by the controls program.

STATEMENT SUBMITTED BY U.S. STEEL CORP.

We appreciate this opportunity to submit our views about wage and price controls. The attempt in the past two and one-half years to exercise wage-price controls in the enormously complex American economy again clearly demonstrates that controls breed shortages, inequities, and economic distortions-both short and long run-all of which aggravate and worsen inflation.

We strongly urge that the Economic Stabilization Act be permitted to expire on April 30, 1974. The best interest of consumers, producers, and the entire economy will be served by such action. At this time our nation needs economic incentives that encourage modernization and expansion that sustain and expand jobs for people-not controls that create shortages and stagnation. Our reasons in support of this position are summarized in the remainder of this statement.

Wage-price controls were imposed in August 1971 as a hoped-for temporary means of reducing the cost-push inflation then flourishing, but for some time it has been apparent that inflation, rather than being reduced, has accelerated and is now galloping at record peacetime rates.

Many factors have interacted to cause sharply rising prices in recent months: (a) The tremendous domestic and worldwide increase in demand for many basic materials-coal, scrap, zinc, tin, copper, and energy, among others. The result has been shortages and higher prices.

(b) Lower than expected food production, as a result of adverse weather, fertilizer shortages, and artificial restraints on crop plantings.

(c) Continued labor cost increases far in excess of long-term productivity gains, with resultant upward pressure on prices generally.

(d) Price increases induced by the controls program and its changing rules, which have made it imperative to secure price increases as quickly as possible and to refrain from price decreases for fear of being locked into such lower prices with changing rules.

Economic controls inevitably result in inequities that worsen as the controls period is extended. The result is economic distortions, the effects of which extend far beyond the controls period.

Reasonable equity is extremely difficult, if not impossible, to achieve in a practical and political world. There is a political tendency for any control program to take precisely the wrong steps to wind down inflation-for example, trying to keep the increase in consumer incomes equal to the rising prices of various scarce commodities. Yet, continuing the rise in consumer income is the surest way to foment a further rise in prices and a continuing and more dramatic shortage among scarce materials. It is politically unpopular, apparently, to let prices rise to accomplish a balanced distribution-or to let profits rise to encourage greater availability. So counterproductive steps become the norm.

The nature and impact of inequities is graphically illustrated by reference to the steel industry. This industry shipped 1111⁄2 million tons during 1973, an all-time record level, and some 21% higher than in 1972. Many products were in short supply because of lack of steelmaking capacity, because of worldwide record demand which made U.S. markets less attractive for imports, and because price controls made the allocation of steel to certain products highly unattractive.