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profitability relative to other products, had resulted in or exacerbated shortages of oil country goods, reinforcing bars, mine roof bolts, and baling wire.

The two Special Rules, however, provided a bare minimum of over-all price relief for the industry. The Council had estimated that net cost-justified price increases over the following year would amount to about one billion dollars in additional steel prices if fully implemented. The strategy, again, was to restrain overall price increases while at the same time alleviating the major distortions.

Following Special Rule No. 5, a cluster of minor steel-related exemptions were announced. The first one involved the steel drum reconditioning industry, which reconditions used steel drums used by other industries to hold chemicals, raw materials, etc. Seventy-five percent of the industry's sales was already exempted by the small business exemption; price increases with exemption were expected to be reasonable because of the industry's need to maintain its pricing advantage over new steel drums which were under controls. Additionally, used steel drums could be sold for ferrous scrap as well as be reconditioned. The reconditioners, therefore, needed the pricing flexibility to better compete with the strong ferrous scrap demand for used steel drums. This exemption came on February 11. Later that week, on February 15, all ferrous and ferro-alloy scrap was exempted. The double-tiered market and distortion problem was discussed above; the exemption was made to eliminate that situation. Simultaneously, the Commerce Department announced a new licensing system for the ferrous scrap export quota to be effective for the second quarter of 1974. This action was made to help slow exports and stabilize the domestic market.

Five days later, February 20, iron and steel foundries, that are heavily dependent upon ferrous scrap, were exempted. This industry had been studied for possible exemption by the Council since earlier in Phase IV. The industry was under severe cost pressures. There had been widespread shortages and shipment delays of several important products (such as steel casing which was critical to the automobile industry in converting to small car production and to the railroads for use in car wheels and brakeshoes). Definition of the industry by SIC Code presented a problem for exemption. A number of items were listed under several different codes because they were produced by several different processes. The industry was finally defined by SIC Code No. 332 or No. 331 and exempted by a strictly interpreted regulation.

Because of their critical relationship to the expansion of energy production, the valve, mine and oil field machinery industries were exempted on February 24, 1974. Capacity expansion demands in petroleum refineries and electric generating plants had created a very high backlog of orders for valves. Similarly, demand for mining and oil field machinery had outstripped capacity. The problem was exacerbated by domestic/international price differentials (for example, 21% of mining machinery shipments and nearly 35% of oil field shipments were exported in 1973). Much pressure to exempt was put on the Council by Congressmen and the industry, especially through the Exceptions process, where one large manufacturing firm threatened to withhold its oil field machinery from the market unless a profit margin exception was granted. Thus, on February 26, valves and mining and oil field machinery were exempted.

On February 28, 1974, the Council issued another Special Rule: Number 6. This Special Rule granted modified volatile pricing authority on ferrous scrap costs, allowing dollar-for-dollar pass-throughs once per month. This, of course, followed on the heels of the ferrous scrap exemption and represented the Council's

intention to provide relief for this skyrocketing raw material cost, especially as it affected small, nonintegrated steel firms.

Additionally, Special Rule No. 6 represented the Council's awareness that a significant portion of the accumulated cost-justification bulge had to be let out. The Special Rule allowed a one-time dollar-for-dollar pass-through of all allowable costs incurred through January 31, 1974. Cost justification materials submitted subsequent to Special Rule No. 5, indicated accumulated allowable costs in the neighborhood of 12 percent over and above what had been previously reported. The Council realized that it had to be careful that the cost bulge on April 30 was not so large that it might trigger an inflationary upsurge that, in turn, might have resulted in a continuation of mandatory controls on the economy.

Following Special Rule No. 6 were two steel-related exemptions. The first was the March 7 exemption of engineered fastener products, such as nuts, bolts, screws, rivets, and washers. A domestic shortage situation existed because of increased demand and insufficient domestic capacity coupled with the fact that imports had fallen sharply due to currency realignments and other international factors. Competition was high in the industry and price increases were expected to be moderate; it was hoped that the resulting pricing flexibility would help the industry compete for steel, which was in short supply, and thereby lessen the shortages.

Finally, on March 21 ferro-alloy metals were exempted. The industry was under severe cost pressures from a combination of rising ferrous and ferrous alloy scrap costs, energy requirements, and pollution control investment costs. Serious shortages in certain ferro-alloys also existed that were exacerbated by increased exports taking advantage of higher international prices.

No major steel or steel-related action followed. Special Rule No. 6 had directed all Price Category I steel firms to report by March 15 estimates of anticipated cost increases between February 1 and the end of July. By the time the Council had received and analyzed these estimates, April 30 was about a month away. Controls on the industry, then, lapsed with the expiration of the controls program. In the three-month period subsequent to April 30, steel prices went up approximately 20 percent.

APPENDIX VI-CRITICAL DOCUMENTS

I. Quarterly Reports

Quarterly Reports of the Economic Stabilization Program provide additional background on the 1973 and 1974 economic situation.

Of particular interest for those interested in decontrol is the Quarterly Report covering the period January 1, 1974 to April 30, 1974. Press releases describing all decontrol actions as well as a series of charts illustrating various aspects of the decontrol process are reproduced in that document. The text itself describes briefly the circumstances surrounding each decontrol action.

II. Press Releases and Fact Sheets

These documents were carefully prepared to describe the reasons for the Council's action and present relevant facts about each industry, many of which led to the exemption action. Of particular interest, the following press releases are singled out:

Retail Trade Exemption-CLC 513
Petrochemical Pricing Actions—CLC 512
Rubber Tire and Tube Decisions—CLC 511
Auto Industry Decisions—CLC 482
Coal Industry Exemption—CLC 558
Се ent Exemption—CLC 472
Paper Industry Decisions—CLC 542
Phase IV Wage and Price Controls Coverage-CLC 563
Exemptions from Phase IV Wage and Price Controls—CLC 572
Dunlop Decontrol Commitment Telegram-CLC 579
Decontrol of Food Retailing and Wholesaling Industries—CLC 570

These documents should be available in key government or depository librar

ies and have been reproduced and indexed on microfiche. III. Regulations

These are also available in the microfiche collection named above and in the Code of Federal Regulations Title 6. IV. CLC Archives—National Archives

The files of the Executive Secretariat and Office of Economic Policy contain numerous industry requests, studies and issue papers discussing most domestic industries. Also, the files of the Office of Economic Policy contain numerous memoranda including proposed decontrol schedules and various staff studies related to exemption policy.

Important and relevant to the subject is the “Black Book” which includes an assemblage of data describing the economic circumstances of most major sectors of the economy and which was prepared at a pivotal point in discussions of decontrol policy. It is discussed in some detail in the text of this paper and can be found in the files of the Office of Economic Policy.

THE IMPACT OF
THE ECONOMIC
STABILIZATION
PROGRAM ON
BUSINESS
FIXED
INVESTMENT

By: Roland G. Droitsch

The following paper is one of the few in this collection that analyzes events during the life of the Economic Stabilization Program from a purely economic point of view. First, the paper reviews some of the models of investment behavior common to current economic thinking and then reviews the policy actions that took place during the controls period that might have, according to the various models of investment behavior, affected the rate of capital investment. In its final sections, the paper empirically examines, through the use of regression techniques, the impact of the Economic Stabilization Program on capital investment.

Mr. Droitsch holds bachelors and masters degrees in political science from Columbia College, New York, and the Maxwell School of Public Administration at Syracuse University, respectively. While at the Cost of Living Council he was employed as an economist in the Office of Program Development during Phase II and the Office of Economic Policy during Phases III and IV. He is currently a doctoral candidate in economics at Georgetown University.

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