Blow to Confidence

April 30, 1962

“But what good came of it at last?” . . .

“Why, that I cannot tell,” said he;

“But ’twas a famous victory.”

Let us see where the President’s great victory over the steel companies is likely to lead us.

The principle has been established that the price of steel, or of any other commodity, ought to be what Mr. Kennedy says it is. How does he know this “right” price? Presumably from his Council of Economic Advisers. They not only know what each price ought to be but what each wage ought to be. In their last annual report they laid down confident “guidelines.” Secretary Goldberg announced that the government would not stand idly by and let wages be decided by free bargaining. It would insure settlements “in the public interest.” When the steel unions settled for an added labor cost of only 10 cents an hour in the first year, he and the President hailed the settlement as “responsible” and “noninflationary.”

There was no Presidential blast at the steel unions for forcing this settlement. Nobody in the White House pointed out that since the steel industry had last adjusted its prices in 1958 there had been four increases in steel wages and benefits amounting to some 40 cents an hour; that the new increase would add another 10 cents; that as compared with average wages of $2.38 an hour in manufacturing in general, wages in the steel industry were already $3.01 an hour—and, plus fringe costs, $4.10 an hour.

STEEL AS SCAPEGOAT

No, the union was congratulated for its moderation and “statesmanship,” and for getting still another “noninflationary” rise. But when U.S. Steel, in a belated effort to catch up on an increase in employment costs of 12 percent since 1958, and a net increase of 6 percent in all costs, announced a price increase of 3½ percent, the White House turned loose all its fury. It denounced the increase as “a wholly unjustifiable and irresponsible defiance of the public interest.”

The steel companies have long been Washington’s No. 1 political whipping boy. When a 40-cent hourly package pay increase and a 30-month contract were forced on them in 1960, they were warned not to raise prices and didn’t. Last September Mr. Kennedy again warned them that they mustn’t raise their prices to meet the coming wage increase on Oct. 1. Yet many now say that the recent announcement of price increases was “badly timed.” Apparently it is never the right time to raise steel prices, no matter what happens to costs.

According to the new mythology, the cause of inflation is not the enormous increase in the money supply, not irresponsible Federal spending, not chronic deficits, not one-sided laws which give labor unions power to demand ever greater wage increases and to boost production costs. The cause of inflation, we are told, is refusal of the steel industry to “absorb” all these costs.

VICTORY FOR WHOM?

The result of the Administration’s policy must be to stunt the steel industry—the foundation of our national defense. Our government wants a big, strong, modernized, growing steel industry—but it mustn’t make profits. In 1961 steel stood only 33rd out of 41 manufacturing industries in return on net assets. Only once in the past twenty years have profits in the industry equaled the 8 cents per dollar of sales that they reached in 1940. In 1961 they were about 5 cents. Yet funds for modernization and expansion can come only out of past profits or out of borrowing in anticipation of adequate future profits. U.S. Steel’s profits available for reinvestment dropped from $115 million in 1958 to less than $3 million last year.

As Professor Livernash of Harvard put it in a report prepared for the Department of Labor in 1960: “Obviously while price policy can be debated in the short run, in the long run all cost increases must be met.” But suppose a President, through lawless price fixing by fury and threat, can prevent cost increases from being met? Then economic growth, modernization and expansion of plant, employment, wages, and output, must all be less than they would have been.

The President has struck a heavy blow at all business confidence. Who can gain from a climate of fear?