‘Isolating’ Steel Prices

August 18, 1952

Mr. Truman’s Wage “Stabilization” Board recommended a thumping increase in steel wages that tore through every “ceiling” that the board itself had set. Before this increase was awarded, hourly steel wages, since the outbreak of war in Korea, had already gone up more than the cost of living. They were already 14½ percent higher than the average hourly wage paid in all manufacturing industry. Mr. Truman nevertheless did everything possible, including resort to unconstitutional seizure of the steel industry, to force the WSB wage increase on the companies. He tried to do this without granting a compensating price increase. Finally he found that in order to get Philip Murray an additional 11 percent increase in steel wages he had to allow a 5 percent increase in steel prices.

The next step was for Mr. Truman’s price controllers to start bitterly denouncing the steel companies for the 5 percent steel-price increase. They studiously avoided any mention of the 11-percent wage increase, forced on the companies, that had made the price increase necessary.

And then the next step was for the price controllers to announce that they were going to “isolate” the steel- price increase from any inflationary effect by forcing steel fabricators and distributors to “absorb” the whole of it.

Now this sort of talk is as dangerous as it is foolish. It begins by ignoring the fact that the steel-price increase was forced by the steel-wage increase. And even a price controller must know that it is politically impossible to grant a thumping wage increase to one group, already being paid above the average, while denying a similar wage increase to other groups. By its decision on steel wages the Administration has left itself no consistent or plausible ground for denying similar wage increases around the circle.

It is politically possible, of course, at least for a short time, to “isolate” a price increase by forcing special groups of fabricators to absorb it. But we cannot escape the long-run economic effects of such a policy. These groups of fabricators will have their costs raised without having their prices raised. Their profit margins will be forced down as compared with profit margins of producers in other lines. This means that production by these steel fabricators—and especially any expansion of their productive capacity, and new capital investment in their industries—will be discouraged and reduced. Yet the steel fabricators represent the very kinds of production—of guns, shells, tanks, engines, ships—that the government professes to be most eager to increase. It need hardly be pointed out that this cost-absorption policy is contrary to any principle of equity. It is an attempt to force a special set of producers to assume the entire burden of a cost increase created by a government decision. A’s profit margin and income are to be cut in order to relieve B. This sets up political discrimination as a policy. Nor would matters be helped by an attempt to penalize all producers in order to help consumers. In the long run, it should be obvious, it can never help consumers to hurt producers. To hurt producers is to hurt production, and to leave less of everything for everybody.

The bureaucrats’ belief that they can “isolate” a particular price rise once more reflects their utter lack of understanding of our marvelous productive system. All prices, wages, and costs are interrelated. The change in a single important price sends repercussions through the whole price network and alters the whole balance of production among different commodities.

It remains to be pointed out once more, finally, that price-fixing is a fraudulent remedy for inflation, and that the Administration’s “fight” against inflation is a sham battle. The cause of inflation is the increase in money and bank credit. The Administration is still busy trying to increase money and bank credit. Its new strategy is what its price fixers are calling “controlled escalation.” As even the friendly London Economist has put it, Mr. Truman “is taking every precaution to insure that the inflation continues through the election period.”