These results reflect the inherent difficulties in price controlling our economy. Today and during much of the control period. we have found ourselves faced with massive cost escalation from sectors which were not subject to practical control, while our prices remained constant or were allowed to increase marginally. Much of this is not said in criticism of the Cost of Living Council, but is presented to you as evidence of the near impossibility of dealing with the prices of large areas of our economy where, by reasons of the impact of international commodity markets, domestic shortages, or higher export prices, such control is beyond the practical reach of the Cost of Living Council.

STEEL SHORTAGES AND DISORDERLY MARKETING

A direct result of our inability to raise prices has been, in a period of high steel demand, to force steel producers to channel steel into those products which offer a higher rate of return, leaving critical shortages in steel products which could only be produced at the lowest margins, or in many cases, at an outright loss. Let me give you four examples.

The high, uncontrolled price of zinc caused a number of steel producers to restrict drastically or, in some cases, suspend altogether the production and sale of galvanized sheets which are widely used in the economy particularly for agricultural and construction purposes.

The prospect of producing steel rods at a loss has led many steel producers to curtail or suspend the production of steel for mine bolts. Limited price relief was given, but not adequate or in time to prevent the actual close-down of two coal mines in eastern Ohio, as reported by Senator Jennings Randolph to the Federal Energy Office recently.

Shortages of drill and line pipe used in the oil and gas industry have been prevalent for some time, stemming in part from insufficient steel production because of price controls.

Production of tin mill products including tin plate and tin-free steel used in food canning has not been adequate to meet the strong demand which inflationary factors have generated for canned foods. A record food pack is anticipated for 1974 and there is apprehension on the part of canners that insufficient tin plate will be available. Prices on such products have been inadequate to support all-out production of these lines.

These shortages do not result from action on the part of steel producers seeking to divert products to the export market where much higher prices prevail. Based on A.I.S.I. statistics for steel producers, steel industry export shipments for the year 1973 were 2.8% of total industry shipments-unchanged from the 2.8% for the year of 1972 and the year of 1971.

Space does not permit the listing of other unsettling effects of price controls in the steel market place. Those examples given, however, dramatically highlight the important and widespread instances in which such controls have failed to achieve te purposes of the Act.

NEGATIVE EFFECT OF CONTROLS ON NEEDED GROWTH IN THE DOMESTIC STEE INDUSTRY

Steel is in short supply in the United States today and this condition promises to continue unless domestic steel producers get into an adequate financial position to expand their facilities. Our best estimates of the growth in steel demand in this country indicate the need to add about 25 million tons of raw steel capacity by 1980 above the present practical capacity of about 150 million tons.

This poses the need for domestic producers to spend between $3 and $4 billion a year to meet the needs of such expansion, to maintain present capacity, and to cover the costs of environmental control facilities. This figure compares with the current level of expenditures of around $1.5 billion a year. Our ability to undertake these programs is directly dependent on cash flow, which has averaged $1.8 billion a year for the period 1968-1972. Record shipment years such as 1973 will add to this cash flow, but at the present rate of return on our investment, it is an unattractive investment for the capital markets to which we must turn for needed financing. The only viable alternative is to increase these margins, through price increases and further modernization, to a point where such margins are more in line with American industry as a whole.

If we are not in a position to undertake these massive additional programs, then the present steel shortage will persist and worsen. We are well beyond the

stage of early warning of such a future major shortage which may rank in its significance, if nothing is done, with the current energy shortage which besets the country.

As a result of price controls and this very low rate of financial return in the steel industry compared with that prevailing in other industries, there has been a sharp reduction in capital spending for steel manufacturing in recent years. The accompanying Table shows that capital spending in the steel industry has decreased from a high of $2.2 billion in 1968 to $1.2 billion in 1972 and $1.4 billion in 1973. The Table shows the substantial divergence between the pattern of capital spending in the steel industry and that in other manufacturing industries. An alternative course of relying on increasing foreign steel exports would be courting disaster. The figures on needed steel expansion in the United States are not based on excluding foreign steel, but rather are based on the assumption that foreign steel will continue to hold its present level of about 15% of the United States markets. The experience of 1973 with reliance on foreign steel supply has proved the folly of looking to foreign producers to meet larger shares of domestic demand. These producers, as demand has surged in their own countries, have reduced shipments to the United States, leaving customers stranded; and their prices, not subject to our controls, have jumped upwards anywhere from $20 to $100 a ton on carbon steel products to a practical limit of whatever the market will bear.

The sum of all this is that continued price control exercised over the steel industry to the tringent degree experienced since August 1971, will lead to halting the American steel industry in its tracks and to its inevitable decline. The loss of jobs and job opportunities to which this can lead is staggering when one considers not only the basic steel industry itself, but the thousands of concerns which supply it. At its present levels of productivity, needed expansion could provide jobs for more than 75,000 additional workers in basic steel, alone. Many thousands more would find employment in increased procurement sources.

CONCLUSION

Throughout the Economic Stabilization Program, the steel industry has been subject to especially strict price limits and has borne more than its full share of the burdens of the Program. Twelve years of stringent government price discipline on steel has led only to shortages, market dislocation, lack of expansion and gross inequities. The evidence is strong and growing that selective price controls on steel and other key basic materials will not work. Nor is the prospect for the success of more comprehensive controls any more promising since the United States economy cannot be insulated from the impact of world market prices for raw materials, energy and ocean transportation.

I feel that the time has come when price controls are counter-productivefor the steel industry and for other areas of the economy as well-and should be discontinued. Whatever remaining anti-inflation benefits the Program contains are far outweighed by the distortions it is producing, and especially, by the long-run harm that results from the artificial disincentives it creates to badly needed capital investment.

Thus, I am in accord with the Cost of Living Council's presently indicated plan to decontrol the economy, industry-by-industry, so that no area (except perhaps the petroleum industry and the health industry) remains subject to price controls on April 30, 1974.

Also, I strongly recommend that the Act itself be permitted to lapse at its April 30 expiration date. I feel that Congress should serve definite notice that the longer continuance of economic controls is not in the public interest.

The answer, it seems to me, is to let the free marketplace determine what steel is worth. It is clear that the current market would support higher prices, as evidenced by the exorbitant prices being paid for foreign steel and by the widespread demands on the Cost of Living Council by steel users throughout the country for decontrol of steel prices to facilitate market supply. There is no evidence that steel prices, after decontrol, would rise to the full levels of foreign steel, but rather the indications are that needed price increases of a more moderate order would lead to a stabilization of the market price levels well below those now being exacted by foreign producers.

The alternatives seem to me to be continuing and increasing shortages and market dislocations or a radical change in our economic system leading to government management of our supplies of steel. One look at the British experience makes it plain that government ownership cannot suspend economic laws.

We submit that the first step in enabling us to undertake the needed job of expansion is the decontrol of prices in our industry by action not to extend the Economic Stabilization Act. The industry is prepared to move immediately with such an expansion if we are given the prospects of successfully attracting needed capital with a more viable rate of return. In my Company, we are already at work on a rounding-out program to balance our facilities to produce an additional one million tons of steel at a cost of about $300,000,000, which we can manage with present cash flow assuming sufficient price increases to offset continuing cost increases. We have on our drawing boards, ready to move, an additional expansion of 2,000,000 tons if improvement in our rate of return makes it feasible to obtain the needed financing. Because of the long lead time needed (3-4 years) to accomplish such a project, the time for action is now. With a return to a free market economy we are prepared to move forward immediately.

Source Cols. 1 and 2-Capital appropriations-The Conference Board. Col. 3-Corporate records.

ALUMINUM COMPANY OF AMERICA,
Pittsburgh, Pa., March 14, 1974.

Hon. WRIGHT PATMAN,

Chairman, House Banking and Currency Committee,
Washington, D.C.

DEAR MR. CHAIRMAN: I want to take this opportunity to express my views regarding the future of the Economic Stabilization Act, and respectfully request that this letter be made a part of the record of the hearings. My position, in brief, is that it definitely would be in the longer run best interests of this country if this act were allowed to expire completely on April 30, 1974.

Many times in the past I have voiced my opposition to both voluntary and mandatory government controls over prices, wages, and other forms of income. In the spring of 1966, in a talk before the Trustees of the Committee for Economic Development, I raised strong objections to, and pointed out the weaknesses in, the voluntary wage-price guidelines the government was then trying to impose on business and labor in an effort to curb inflation. Again in November, 1970, I objected strenuously to a CED report that advocated voluntary wage-price controls and the establishment of new government institutions to police such controls.

Among the many reasons why I oppose controls as a potential cure or brake on inflation are the following:

First.-Controls on prices and wages simply do not work as an effective measure to curb inflation over any extended period. It may be true that controls can temporarily suppress inflationary pressures in certain parts of the economy. However, as time goes on, the inflationary forces will lead to results which are even less palatable than higher prices; namely, reduced output, shortages, inefficiencies, dislocations, black markets, and loss of freedom.

The reason controls can only suppress (not stop) inflation is that they deal only with the symptoms and not the basic causes of inflation. The major causes of inflation are the fiscal and monetary policies of the Federal Government.

Both political parties must share the blame for our inflation since the mid-1960's. For political reasons, the Administration and the Congress frequently either avoided or delayed the proper economic measures. They have persistently pursued expansionary policies well beyond the limits of prudence. Over the past nine years, they, as well as the American electorate, have either overlooked or forgotten the inflationary consequences of large budget deficits and excessive increases in money and credit.

Since the outbreak of the Vietnam War the deficits in the unified Federal budget have aggregated on a net basis approximately $100 billion, including the modest surplus year of 1969. One-third of this aggregate deficit occurred during 1967 and 1968, and 60 percent occurred during the past three fiscal years. In its role as central banker, the Federal Reserve Board has financed most of these huge deficits through the commercial banking system, thereby sharply increasing the money supply, accelerating credit expansion, and adding fuel to the fires of inflation. The simple fact is that when the volume of money rises faster than production, prices tend to rise. During the past three years, real Gross National Output has expanded nearly 16 percent, but the supply of money has increased 33 percent more. I don't think it is any mystery why the United States has been and is now experiencing a worsening inflation.

Second.-Controls foul up our impersonal, but remarkably efficient, price system by blunting its essential role as "traffic cop" in both influencing demand and allocating resources. Economic efficiency, the development of new and better products, and expansion of industry that alone can provide jobs for an expanding population, all depend on flexible prices for individual products-on the ability of prices to adjust themselves to demand in the marketplace.

The up-and-down movement of prices in a complex, inter-related economy such as ours rations and allocates manpower. materials, finished products, services, and capital from one use to another; it regulates the expansion and contraction of industries; it directs our economic organization; it determines the disposition of all of our resources. On the other hand, man-made controls of any kind tend to alter or retard these price adjustments that are the impersonal control mechanism that makes our private enterprise system so efficient and adjustable. Controls ignore the differences in price history among products and industries. They prevent the appropriate allocation of resources that the free market system provides through its price signals. They build distortions into the marketplace. They compel shifts in the industrial production pattern that would not normally take place. Products we need are kept out of the domestic market or forced into overseas markets; the American economy is suffering numerous examples of this today.

The effects of price controls on the aluminum industry, for example, have forced domestic firms to abandon or curtail output of many products on which allowable ceilings preclude a reasonable return on investment. Controls have also caused domestic firms to divert products overseas where prices are much higher; during most of last year, for instance, foreign prices for primary aluminum ingot were generally ten to fifteen cents per pound higher than the 25-cent domestic ceiling. As a result, exports of aluminum products were about 70 percent higher in 1973 than in the prior year, whereas imports dropped 20 percent. Such abrupt disruptions, distortions, and diversions would not occur without controls. The price system, if left alone, will perform the critical role of balancing supply with demand. No matter how smart or dedicated they are, government controllers and regulators simply cannot run an enormous, highly inter-related production machine like the U.S. economy. They are remote from the complexities and realities of the marketplace. Government controllers are simply incapable of equalling the collective competence and preferences of American consumers. Their acceptance or rejection of products and services in the marketplace is the only control that really works.

Third. The longer controls stay in effect, the more they tend to exacerbate the basic inflation problem. There can be no doubt that controls create supply disruptions and shortages, largely because they short circuit the information system (prices) between buyers and sellers. Not only are Phase IV rules complicated and varied by industry, but they also concentrate on regulating price changes according to cost increases, not market demand. The inevitable result is a growing list of intermediate and final products that are in relatively short supply.

I find great significance in the results of the survey conducted by the National Association of Manufacturers last November and released on January 7. Hun

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dreds and hundreds of different products were named as being in short supply to varying degrees, ranging from critical, to significant, to moderate. I can vouch for the shortage of many of the products named, based on the experience of my own company in recent months. Of special significance, however, is that 85 percent of the respondents predicted a serious worsening of shortages if controls continue, and at the same time, 84 percent said there would be an improvement in the shortage problem within the next six to twelve months if controls were ended promptly.

The continuance of controls, with accompanying and inevitable shortages, will very likely lead to further distortions and disruptions in production and to sacrifices in output. Such disturbances in output will tend to reduce productivity, raise unit costs, and ultimately push prices higher. In the short run, of course, prices and profits must be permitted to rise so as to encourage capital investment. Only in this way can output be expanded, productivity improved, and relative costs and relative prices lowered in the longer run.

Some years ago, I received an enlightening lesson in the realities of a controlled economy from the minister of economics in Czechoslovakia. He told me that post-war Czechoslovakia started out with a first-rate industrial machine. Their tools and equipment were of the highest order and their designs had great acceptability around the world. After twenty years of rigid control imposed by the Central Committee, he said, Czech industrial designs had become obsolete, their machine tools were hopelessly outmoded, their factories were worn out for lack of maintenance, and their economy generally was in horrible shape. Today, the bosses in Czechoslovakia and most other communist countries are trying to inject a little old-fashioned capitalist incentive into their system in the hope of undoing some of the damage they have done, while we are unwisely but effectively squeezing the incentive out by controlling prices.

Somehow I find it hard to believe that freedom-loving Americans are going to be willing to travel very long on the road to a completely controlled economy. The imposition of mandatory controls was a serious blow to the American productive system, a system that is the envy of every country in the world and one that has brought us all of our material and social progress. In my opinion, a private enterprise, decentralized free-market system, if freed from controls, is far more capable of equating unlimited demands with limited resources, at lower prices, and with less loss of freedom, than is any centralized government planning system I recognize, however, that a vote to abandon controls will not be an easy political decision. Very likely most of the price indexes would vault upward for awhile as suppressed or hidden inflation moved into the open. Consumers in general probably would be temporarily unhappy with the higher prices, but as time went on, compensatory economic adjustments would take place. Certainly, the shortages would diminish.

Whether or not general inflation will diminish in this country is not directly related to the future of the Economic Stabilization Act. While the elimination of controls will enhance the longer run productive potential of this country and improve its ability to adjust more rapidly to ever-changing economic conditions, such as the effects of devaluation and energy shortages, only prudent Federal spending control and less monetary growth can truly bring out inflation under better control. I urge that price and wage controls be terminated by allowing the Economic Stabilization Act to expire.

Sincerely,

JOHN D. HARPER,
Chairman of the Board.

STATEMENT BY O. PENDLETON THOMAS, CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER, THE B. F. GOODRICH CO.

I appreciate the opportunity to express my views on wage and price controls. I represent The B. F. Goodrich Company, a producer of rubber, plastic, chemical and other industrial products, which is classified for purposes of the Economic Stabilization Program as a "price category 1 firm."

Rather than generalize, I think you will see in the experiences of our Company the shortcomings and side effects of controls insofar as production, investment incentives and distribution are concerned.

If we have learned any lessons from our experiences during the last two and a half years of formal controls. I hope one stands out. Our economy is a highly