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Let me say, Mr. Chairman, that I have a very long statement. It is quite a detailed statement. It is very necessary that I make it. I will be glad to stop and explain at any time, if there is any question about what I say, or any explanation is desired. On the other hand, for the sake of clarity in explaining our attitude and the standards we use, it probably would be more helpful if we could go along on the statement and reserve questions until I have concluded. However, I am at the service of the committee.

Senator HUMPHREY. May I suggest that we would like to have the full statement, of course, read and presented, and at your suggestion I think we can refrain from asking questions until you have completed your statement, and then we surely will come back and ask you

some.

Mr. ARNALL. It is such a highly technical question that I am afraid if we stray away from the context of the statement we will lose the full import of the position we take.

On the other hand, let me again say that I want you or any member of the committee to feel free to stop me or ask any question at any time. I mean, you are the judge of that. Thank you, sir.

First of all, let me say that I have thus far refrained from discussing this subject extensively in public. I have carefully avoided doing so while private negotiations were in progress and there was some hope that they might lead to a settlement.

Now, however, this dispute has become a matter of large public interest, in which the Congress must have a deep concern. Therefore, I can only welcome this opportunity to acquaint the Congress fully and in detail with the position of the Office of Price Stabilization and with the facts upon which our position is based.

RELATION OF WAGE AND PRICE STABILIZATION POLICIES

It is a matter of regret to me that price stabilization policies have become enmeshed in a labor dispute, or even in a problem of wage stabilization. Wage and price control are closely related in the sense that both are part of a larger stabilization program. Both must be subject to mutually consistent rules or policies which bring about sound and effective stabilization of prices and wages. Nevertheless, it has been my view, and the view of my agency, that the day-to-day administration of these controls must be kept separate and apart. We have never believed that a wage increase which is appropriate in terms of sound wage stabilization standards should be denied merely because that increase might require higher ceiling prices. Nor, on the other hand, do we believe that a wage increase which is in excess of sound wage stabilization standards should be approved merely because that wage increase would not require higher price ceilings. We believe that once the stabilization framework has been set up, rules of equity should govern wage decisions, and a similar set of principles should be used in judging the propriety of requested price increases. To base either wage or price decisions upon the consequences in the other field would be to abandon those rules of equity in relation both to labor and to business.

To say this is certainly not to say that price control officials can ignore the movement of labor costs any more than to say that wage control officials can ignore movements in the cost of living. Under the

Defense Production Act, ceiling prices must be generally fair and equitable. Clearly, ceiling prices which are indefinitely maintained in the face of rising business costs may no longer be generally fair and equitable. In this respect labor costs must receive the same consideration as any other kind of costs. An increase in labor costs may render a previous ceiling price no longer fair and equitable in the same way as an increase in transportation costs, raw material costs, or any other element of sellers' necessary expense.

STANDARDS FOR APPROVING PRICE INCREASES

One of the principal tasks of price control law and administration must be to develop rules and procedures under which sellers who have experienced cost increases may ask for, and in appropriate instances receive ceiling price increases. In our view the request by the steel industry for higher prices is simply one of a large number of similar requests. We receive such requests every day.

În order to decide which requests for price increases should be granted and which should be denied, we must have rules-and I repeat: we must have rules-by which we can say "no" to some demands for price increases, and "yes" to others. Without such rules, price control could not operate. If price increases were permitted because the people in an industry were "gentlemen," or belonged to the right political party, or because they screamed the loudest, government by law would have disappeared, and freedom and individual rights would have perished.

In judging the need for price increases we must look first at the provisions of the law itself. Two of the standards established in the Defense Production Act are relevant to the present case. The first is specific. It is section 402 (d) (4)-the so-called Capehart amendment-under which OPS must permit price ceilings to be raised so that they equal pre-Korean selling prices plus all increases or decreases in costs up to July 26, 1951. Until the present wage negotiations began, none of the steel producers had applied for such adjustments. Late last year, however, several members of the industry indicated that they wished to be permitted to adjust their ceiling prices in accordance with this provision of the act. The law requires that these requests be granted. We have no choice in that respect. Actually, however, the Capehart provision is completely independent of the wage negotiations and properly has no relationship to cost increases arising since July 26, 1951.

We had already issued regulations informing other industries how to apply for Capehart adjustments. However, because of the complexity of the steel industry's price and cost structure, the development of a regulation prescribing the manner in which steel producers could submit such applications has taken considerable time. Consultations with the industry on the final form of regulation were postponed at the request of industry representatives who apparently felt that the price increases involved were too low to be acceptable in the present crisis.

I wish to point out to the committee, however, that we stand ready at any time to grant the industry-or any member of it-the full measure of price relief required under this provision of this act of the Congress.

THE INDUSTRY EARNINGS STANDARD

The second relevant provision is more general. The Defense Production Act lays down the requirement that price ceilings must be "generally fair and equitable." To carry out this direction, the OPS with the approval of the Economic Stabilization Administrator, has issued what we call the Industry Earning Standard. This is the principal OPS standard used for determining which price increases should be granted and which should be denied, and it applies to the case under discussion. Briefly stated, this standard requires OPS to raise prices for an industry if and when its returns on the owners' investment, before taxes, falls below 85 percent of the level enjoyed in the best three of the four prosperous years 1946 through 1949. I am sure you members of the committee recognize that this standard is very similar to the one Congress used in the excess profits tax law. Stated broadly, then, ceiling prices will be raised when an industry generally falls out of the excess profits tax bracket.

Most requests for price increases, and thus most occasions for the application of the Industry Earnings Standard, come when an industry has experienced cost increases. Price stabilization would be a mere mockery if all cost increases were automatically passed on in the form of higher ceilings. If this were done, the spiral of higher wages, higher prices, higher parity, higher cost of living, higher wages, and so on, would operate completely unchecked. When steel-or any other industry-tells us it has incurred higher costs and needs a price increase, we find out whether these higher costs can reasonably be absorbed out of abnormally high profits. If they cannot, the price increase is permitted. But if absorption of the cost increase would still leave a fair return, or more than a fair return, the price increase in emphatically denied. This is reasonable. This is fair. And this is the way business itself normally operates.

Cost increases cannot be absorbed without limit. The Industry Earnings Standard is our limit on required absorption of cost increases. This standard protects a level of profits as high as those realized in a normal, prosperous, peacetime period, during which industry produced at a high level and expanded at a rapid rate. Profits that high are high enough to provide adequate incentive when our Nation is in danger.

The standard is legally sound as an interpretation of the requirement embodied in the Defense Production Act that price ceilings be fair and equitable. Based on identical language in the wartime price control legislation, OPA used an almost identical standard and this standard was upheld by the highest courts of our land time after time.

Of course, no single rule can be devised which is uniformly equitable in all cases. The OPS Earnings Standard recognizes this by making special provision for those cases where its rigid application would be unfair or unreasonable. Thus there are cases where an industry's earnings during the 1946-49 base period were abnormally low or otherwise unrepresentative, and for which the standards consequently makes special provision.

BASE PERIOD HIGHLY PROFITABLE FOR STEEL

In the case of the steel industry, however, the 3 years from 1947 through 1949 were the most profitable the steel industry had experi

ANNUAL RATES OF RETURN ON STOCKHOLDERS' INVESTMENT FOR PRINCIPAL STEEL COMPANIES COMBINED

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enced since World War I. This is clearly demonstrated in the chart which I should now like to show to you. This chart is based upon data supplied by the Federal Trade Commission to the Joint Committee on the Economic Report in 1949, and supplemented for recent years by the FTC at our request.

And in that connection, Mr. Chairman and Senators, let me say that Chairman James Mead, of the Federal Trade Commission, is ready, willing, and able at any time you might suggest, to appear here before your committee and verify the accuracy of the computation and figures which this chart reflects.

1950

Office of Price Stabilization

Office of Economic Policy

April 1952

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7 the chas the chart is headed "The annual rates of Svestment for principal steel companies comWe the general impression which this chart gives te car rent, I might supplement it with a few numbers. 68, which are the best three of the four base-period THE CONÈISELY averaged almost 19 cents' profit before taxes on 2 period since 1919 was the period 1941-43; during this **** 21 z of stockholders' investment, or net worth. The second estment Daring only two other years-1929 and 1944-did steel company earnings exceed 11 cents. The average of the 1920's was Scents The average of the thirties was 2 cents.

of the forties was 15 cents.

And the average

After income taxes, the 1947-49 period provided a higher average rate of return than did any single year between 1918 and 1947. Obviously, the base period for the Industry Earnings Standard was an extremely favorable one for the steel industry. Even if earnings were to fall to the level of that period, the steel industry would still be unusually prosperous. As I shall show your shortly, however, there is no immediate prospect that this will occur. increase recommended by the Wage Stabilization Board would actuto show you this, I will first have to show you how much the wage ally cost the steel industry.

THE COST OF THE WAGE RECOMMENDATIONS

In order

I am sure you already have in your record the specific proposals made by the Wage Stabilization Board for the settlement of the economic issues in this dispute. We have computed the cost of these proposals to the industry, including the cost arising from the application of higher wage rates to overtime pay, vacation pay, pensions, social security, et cetera. We also have taken into account the industry's custom of giving its salaried employees an increase equal in percent, rather than cents per hour, to the wage increase granted to plant workers. I believe that I need not go into these computations in detail, since I can assure you that our figures have been checked with the industry's own statisticians and experts and there is no difference of opinion about them.

And in that connection, let me point out to the committee that we in OPS are leaning over backward to use figures that really are higher-that is, more favorable to the steel companies-than at times we actually think may be the case.

Nor is there any difference as to the translation of the cost per hour into cost per ton of finished steel. Our statisticians and the steel company statisticians have worked together on these figures for several weeks. Industry experts agree with us that it takes 17 man-hours to produce a ton of finished steel. This includes the time spent in operation of coke ovens, blast furnaces, steel-making furnaces, and rolling mills, as well as the time of clerical, administrative, and sales

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