On November 27, three exemptions were announced. Two of the exemptions, honey and dehydrated alfalfa, were considered to be "cat and dog" industries, because their price impacts on the economy were so small. The problems they were suffering from, however, were quite serious to the industries. In both cases, Phase IV regulations had inflicted certain hardship on a few of the firms in those industries not exempt by virtue of the small business exemption. A more detailed discussion of these may be found in the Economic Stabilization Quarterly Report for the last quarter of 1973 and the first quarter of 1974 (the final quarterly report). The third industry, cement, was what came to be known as a "target of opportunity." Cement Because of its importance as a construction material, the cement industry was considered early in the Program. As such, cement plays an integral role in the expansion of industrial capacity. Due to inadequate capacity and high demand, the inflationary forces in cement during Phase IV were of a demand-pull nature. Hence, eventual achievement of price stability hinged in part on the ability to expand industrial productive capacity. An adequate supply of cement at reasonable prices was, therefore, important. The negotiations and preparations for the decontrol action were probably somewhat expedited because John Dunlop had extensive knowledge of the industry as a result of his experience as a labor mediator in the construction industry. In return for decontrol, the following commitments were received from the major cement producers: 1. No price increases before January 1, 1974; 2. Expansion of productivity capacity should take place as rapidly 3. Actual cement selling prices (as opposed to list prices) were 5. New price levels reached after January 1, 1974 were expected The commitment dealing with the reporting of actual cement selling prices to the Bureau of Labor Statistics was an attempt by the Council to use its leverage to upgrade the accuracy of price data collected by the government. At this time, the Council decided tentatively to integrate this type of commitment into major decontrol agreements. However, it was included in only two other exemptions: semiconductors, and rubber tires and tubes. It turned out to be too time consuming, both in the negotiation process and the follow-up. Nonferrous Metals The nonferrous metals involved in a December 6 action taken by the Council were zinc, lead, copper and aluminum; also included were the lesser nonferrous metals (e.g., bismuth, antimony and cadmium). The manner in which the nonferrous metals situation was handled is illustrative of the flexible approach the Council applied in granting relief, especially before it became fully committed to the idea of decontrol. At the beginning of Phase IV, worldwide supplies of zinc were extremely tight, pushing unregulated world prices above controlled U.S. prices. Domestic productive capacity had declined about 40 percent since 1965. Since 1970, seven of the fourteen zinc smelters in the country had closed, only one of which was being reactivated; two of the surviving seven were expected to close. Obsolescence, low prices and low demand during the late 1960's coupled with a cost-squeeze at the time (due to raw materials costs and antipollution requirements) reduced capacity. Worldwide and domestic demand began to build in late 1971. By 1973 the U.S. was not only importing about 5 percent of its consumption of the various processed forms of zinc, but also, because of the reduction of smelter capacity, it was importing a greater proportion of zinc metal as opposed to zinc concentrates. The importation of zinc metal is more expensive because the cost of smelting the ore is included in the price. Several zinc companies filed for exemption early in Phase IV. They argued that exemption was necessary to allow them to sell at the world price and thereby generate funds necessary to finance the development of domestic ore bodies and smelter capacity, and to avoid exacerbating domestic shortages even further. Their essential problem was one of demand going through the ceiling rather than forced cost absorption. Nonferrous metals had a history of cyclical demand and were presently in the midst of a strong upswing. Phase IV base price regulations, on the other hand, essentially froze domestic prices, which, during the base period were at relatively low levels reflecting a period of slack demand. Although they had accumulated costs sufficient to gain some relief, domestic zinc firms did not have enough accumulated allowable costs to justify price increases which could bridge the disparity between domestic and world prices. The Council studied this situation intensely during the Fall of 1974, meeting with and receiving correspondence from industry officials, zinc consumers and members of Congress. On October 29, 1973, the Council formally denied the zinc exemption request and officially advised the industry that they should first exhaust their means of relief through established channels such as exceptions and prenotifications. The distortions in the nonferrous metals sector were generally serious. It was generally accepted that relief would have to be granted in some form. Because of the economic flexibility still available to the industry, CLC was not pressured to make a decision at this point as it had been on the fertilizer question. The Council opted to make a more thorough study of the problem and try to deal with zinc and the other nonferrous metals together in one action rather than piecemeal, and perhaps too hurriedly. The situation in the copper and aluminum industries was similar to that of zinc: worldwide demand outstripping capacity and domestic shortages being exacerbated by two-tiered markets. The magnitude of the distortion and other problems did not, however, appear to approach that experienced by the zinc industry. Throughout November, the Council met with industry officials and made further studies, exploring various possible forms of relief for the different metals. Ultimately, it was decided that copper and aluminum did not require complete decontrol at the time (copper and aluminum were judged to have significantly more inflationary impact than zinc, and their distortion problems did not present a compelling case for decontrol). The Council was also having difficulty obtaining satisfactory commitments. On December 6, 1973, after negotiations with the industry by Dunlop and McLane, from copper and aluminum firms, the Council announced the exemption of zinc, the lesser nonferrous metals and most nonferrous scrap; but only allowed base price adjustments for aluminum and copper in order to lessen the incentive to export by permitting their controlled prices to move closer to world prices. In return for decontrol, major zinc producers pledged that profits derived through exempt zinc prices would be utilized to finance domestic capacity and to develop new mine resources. Although formal price commitments were not sought, the Council and the major companies had an informal understanding as to how high prices would go. Some confusion followed this action, highlighting the complications that could be caused by decontrol of a basic commodity. In clarification, during January, the Council had to issue regulations exempting ferronickel and certain nonferrous alloys through the processing stage (basic shapemolding). In March, 1973, the Council reached agreements with the major aluminum producers in return for decontrol. The copper industry, on the other hand, was left under controls until April 30, when the Program expired, because satisfactory commitments were not forthcoming. At that time, the four largest aluminum companies agreed not to charge more than 31.5 cents a pound for 99.5 percent primary aluminum ingots before June 1, 1974, and not more than 35.5 cents a pound through August 1, 1974. The companies further agreed to maintain established market relationships with the prices of other primary aluminum products. The action also addressed the problems of non-integrated firms in the industry. Historically, the integrated firms were a source of raw materials to the non-integrated firms. Higher prices on world markets disturbed this relationship, leading integrated firms to decrease their sales of raw materials to domestic non-integrated producers in favor of the export market. In order to help these non-integrated companies, commitments were structured such that the signers of the agreement pledged to maintain historical rates of sales to non-captive domestic firms. These later agreements were generally more sophisticated in that they dealt with broader, secondary considerations that accompanied sectoral decontrol in a complex industrial economy. Transition Period-December and January After the first week of December, the Council's decontrol attitude began to change. The underlying principle for decontrol policy asked the question "Is there an indisputable reason to remove controls?" The fact that the answer to this question was often "yes" highlights some important changes in the perception of the role of controls. Indeed, decontrol, as a form of relief, was almost forced upon the Council at this time as a remedy for certain economic distortions. In previous Phases of the Program, relief measures were rarely so extreme. Special rules or the narrower relief of an exception (see paper on Exceptions) were the principal tools used to handle unusual economic situations. The fact that outright exemption became an economic necessity and a politically viable option demonstrate the very different economic environment under which Phase IV controls operated (as well as the changed public perception of controls; i.e., that controls could distort as well as restrain). Few major exemptions had been granted thus far in the Program. The Council's policy had been to exhaust all avenues of relief under the administrative regulations before granting outright exemption. The change from this attitude to one where decision makers' primary question became, "Is there a strong reason to continue controls in a particular sector?," took place over a two-month period, starting with the exemption of the major auto producers in December and continuing through the end of January with exemption of rubber tires and tubes and petrochemical feedstocks. Also, during this period, the Council staff refined the necessary machinery to get the job done, if necessary, by April 30. THE IMPACT OF THE ENERGY CRISIS From October on, it became clear that the energy crisis was going to complicate Stabilization policy. Instead of the expected stability in foreign exchange markets and decline in the rate of inflation, the energy crisis precipitated an acceleration in the rate of inflation, a shortage of many petroleum-based materials, and continued fluctuations in exchange rates. During this period the Council staff continually consulted with outside economists as well as other government agencies on this very serious problem. Initial studies predicted massive disruptions in the economy leading to perhaps an 8 to 10 percent rate of unemployment. As the situation worsened and the embargo was imposed, the Council initiated more serious internal studies of the petroleum problem. Thus, the Council, in a de facto fashion, halted implementation of decontrol until the full impact of the energy crisis, both politically and economically, could be assessed in the broad context of a reassessment of stabilization policy. A serious and comprehensive study was undertaken, exploring possible changes in controls to respond to the changed economic conditions brought on by the energy crisis. Among the considerations were special rules for energy cost passthrough as well as cessation of decontrol activities and maintenance of strict regulations. When an option paper went to Secretary Shultz in early January, it was finally decided to keep the Program essentially intact and proceed with decontrol. It was agreed that industries affected by energy prices or shortages should be dealt with on a case-by-case basis. This consideration was the major factor behind the hiatus in the granting of major exemptions between December 10 and Jan |