competitive to keep retail prices from rising beyond the amount of cost increases. It was frequently argued that the retail trade, which traditionally functioned with thin profit margins, was, due to its inability under the regulations to directly recover increasing overhead costs and its inability to control the mix of sales, more severely handicapped by price controls and the profit margin limitations than other sectors. Secretary Shultz had consistently held the view that the retail trades could be safely decontrolled. Congress had, twice in the past, indicated such an opinion.

During 1973, the retail sector experienced increased operating costs. Phase IV regulations (Subpart K) were such that retailers' percentage markups were hinged to increases of product costs only. Consequently, operating costs could not be passed through and could be recouped only to the extent that margins allowed, if product costs increased at rates equal to or greater than those of operating costs. Thus, in late 1973, the regulatory arrangement was thought to be forcing some degree of cost absorption.

Arguing against decontrol was the high visibility of the retail sector which could have some bearing on consumer attitudes towards inflation and controls. Removal of controls over the retail sector was expected to significantly reduce the Program's coverage of the Consumer Price Index; therefore, decontrol of this sector had to be weighed carefully. With the notion that some action might be taken shortly after Christmas, a comprehensive study of the retail and wholesale trades had begun in mid-November of 1973.

A post-Christmas announcement seemed desirable for a number of reasons. Retail trade sales were not expected to increase excessively in 1974, as demand growth receded. A survey had shown that inventory levels were generally high, which indicated that demand was slowing down. Slack demand and high inventory levels would exert downward pressure on prices. The energy crisis was also expected to limit demand in the short-term. Finally, the spring-summer catalogues of the large mail-order houses are released in early January each year; high publication costs guaranteed that prices for Spring and Summer catalogue merchandise would most likely remain unchanged after decontrol.

A parallel wage exemption would pose few, if any, problems. Most retail trade employees were exempted already by the low-wage exemption. Unionization in the industry was low, and the number of union workers with contracts expiring in 1974, as a percent of total retail employment, was small. Competition in the retail trade sector was generally acknowledged to be active and analysis indicated that there had indeed been some recent cost absorption in the industry.

Despite all of the favorable factors in the analysis, the upcoming Congressional testimony left one major uncertainty: exemption of retail trade would (excluding food, petroleum and autos) reduce direct Phase IV coverage of the CPI by 14.6 percentage points from 42.6 percent to 28.0 percent. Would decontrol of this sector represent an abdication of responsibility? As analysis proceeded and the matter came up for additional consideration, the senior staff's perception of the proposed action was softened by some additional statistics which showed that the actual impact would be less than the CPI analysis indicated. Thus, in principle, the Council decided to go ahead with the exemption. The decision was discussed with Secretary Shultz who urged the Council to go ahead. Once the decision was made to announce the exemption prior to the February 6 testimony, the issue was sealed and the exemption was announced on February 1, a date which coincided with the end of the fiscal year for most retailers.

It was clear, however, that with the announcement of this large exemption, industry pressure for decontrol would increase. As the press release and fact sheet for this exemption announcement were completed at 3:00 A.M. on February 1, Don Conlan remarked, "This is it. The plug-puller."

Following the retail trade action, a number of industries were decontrolled at approximately weekly intervals as a back-log of studies and decisions already completed reach final preparations for implementation. (Once again the reader is referred to Quarterly Reports and press releases of the Cost of Living Council.) Quite a few had been bottled-up during the transition period partly because of uncertainty over policy, but also because of the time required to study and process each potential exemption. Additionally, after John Dunlop's testimony took place on February 6, much of the Council's resources could turn again to decontrol matters.

PAPER

The paper industry negotiations and commitments for decontrol were among the most time consuming and complex of the entire decontrol process. The paper industry faced problems in early 1974 beyond those caused by controls. A severe world-wide shortage of pulp, a basic input to papermaking, caused world prices to soar above controlled domestic prices in late 1973. This situation, in turn, served to encourage exports, which further reduced supplies in the U.S.

Controls were limiting the pricing flexibility of small domestic non-integrated firms and thus their ability to compete for high-priced imported pulp, which accounts for nearly two-thirds of pulp available

domestically. More important, because of the general pulp shortage, it was difficult for these firms to purchase domestic raw materials even at controlled prices; large integrated producers had been forced to use a greater proportion of their own pulp, thus drying up the primary source of domestically produced pulp. This led to several mill shut-downs in paper industry towns, contributing to unemployment as well as to the paper shortage.

The production problems of the paper industry were not limited to pure raw material constraints. New capacity, especially in pulping, was needed as well. Despite the fact that the paper industry planned to increase capital investment in 1974 by over 30 percent over 1973, more than 40 percent of this was slated for pollution abatement equipment, which does not generally add to productive capacity. As discussed in an earlier section, Edgar Fiedler launched some preliminary feelers with paper companies to gauge their interest and willingness and to make commitments in exchange for decontrol. After these discussions were broken off at year end and as the Council moved into a decontrol mode, it was planned that Dr. Dunlop would take personal charge of the negotiations. The press of Congressional testimony (see Congress and Controls paper), and other matters led him to turn the situation over to Don Conlan, who by this time had negotiated most of the Council's commitments. In early February, Conlan called in large and small paper manufacturers and users, and began an intensive study of the industry in order to accurately determine key points that would have to be included in a decontrol agreement in order to provide some relief to the market but still avoid excessive price increases or distortions. The basic parameters of a decontrol agreement were worked out in these sessions.

A major difficulty was posed by the need to develop a commitment for more than 10 separate items that would be acceptable to each of the three dozen large firms in the industry. Part of the difficulty was in the fact that prices then being charged for the various products differed among firms, as did product mixes. After much discussion and analysis by Conlan and the Council staff, an arrangement was worked out that the Council thought would provide sufficient economic incentive (via price relief) for the major paper firms to commit, and still be sufficiently restrictive so as to meet the Council's price stabilization responsibilities. The proposed commitment had several objectives and attempted to address both long-term and shortterm problems of the paper industry. First, it was hoped that decontrol would give some of the non-integrated firms immediate pricing flexibility and increased pulp supplies, allowing them to continue paper production with minimal disruption. Export and pricing com

mitments were designed as part of the package in order to boost domestic supplies of pulp.

In identifying major paper companies, the Council found there to be 35 firms in the industry with over $150 million in domestic sales during 1973. This was far too great a number with which to negotiate individually in any reasonable length of time. So, after generally discussing commitments with several major firms, it was decided to announce a conditional exemption, to publish the conditions of the exemption and give firms the option of "signing up" or remaining controlled. For this reason, the March 8 announcement stated that pulp, paper and paper products were all exempted, except that all manufacturers with more than $150 million in (domestic 1973) sales of products covered by the exemption had to submit written voluntary commitments to the Council with respect to future pricing and export behavior by March 15, 1974, in order to qualify for decontrol. The Internal Revenue Service was asked to verify the Council's list of firms with over $150 million in sales. The Service's rapid response to this request, allowed CLC to accurately determine those firms which were still subject to controls. A total of 33 firms signed such agreements.

Finally, a task force of labor, management and government officials was formed to explore long and short term problems facing the industry. At the first meeting of the body, a recommendation was made to encourage large producers to allocate additional supplies to small producers, thereby protecting the jobs in non-integrated mills with hardship situations.

A few points in the general agreement were negotiable, but only with the express consent of the Cost of Living Council, and these were allowed only to reflect some unusual circumstances which, in the Council's view, did not detract from the equity of the agreement. For example, exporters of pulp were required to limit 1974 exports to 1973 levels, except where binding contracts had already been entered into in excess of that amount. Each of these cases was considered separately by Council staff and approved by Conlan.

The paper exemption was expected to put new cost pressures on the printing and publishing industry which had been suffering from shortages of paper products and rising postal rates. Newsprint, a major element in newspaper publishing, also was in short supply. Affected by rail and newsprint strikes during the last quarter of 1973, newsprint surplus stocks had reached dangerously low levels and prices had gone up rapidly. The shortage curtailed press runs and cut back on news and advertising space. Magazines were likewise suffering from the shortage of coated papers.

Thus, when paper was exempted, the Council shortly thereafter took parallel action with the publishing and printing industry. At the same time the Council decided to include the broadcasting industry and other related communications services after staff studies confirmed the competitive inter-relationships among these industries. They were exempted without commitments on March 15.

Because important collective bargaining talks in the newspaper industry were in progress during March, the wage exemption for all newspaper employees was delayed until April 2, 1974.

Coal

Throughout the months of February and March, 1974, the Council continued to study the special problems of other industries and to grant exemptions where appropriate. These are dealt with in Economic Stabilization Program Quarterly Reports and press releases.

One of the most significant actions during this period was the coal exemption on March 27, 1974 which capped one of the most wideranging decontrol packages to be developed. This exemption grew out of an extensive effort by the Council to go beyond simple decontrol and develop a comprehensive Federal coal policy for 1974. As part of the package, 10 major coal companies signed commitments agreeing to price restraint, capacity expansion, export diversion and improvement in labor relations.

General Decontrol with Express Exceptions

During the first part of February, two key staff people in the Office of Economic Policy were assigned to determine what industries and sectors remained under controls and what existing decontrol plans called for. After putting together this information (internally known as the "cookie cutter") the next step was to be the development of a strategy for effecting nearly total decontrol on or about April 30. Most major sectors of the economy were found to have already been either decontrolled, analyzed for decontrol, or scheduled for analysis. However, it was clear from the study that there were a large number of diverse sectors remaining under controls. The task of processing these industries piecemeal, by four-digit SIC code, would not allow decontrol to be completed by the end of April. Not only would it have involved a considerable expenditure of staff time, but there were also severe data limitations. Many of these sectors were small, and government and industry data on them were weak. Many of them represented economic activities that were not easily definable by SIC code. In addition to assessing the relative (controlled