The Web of Prices

May 6, 1963

After his talk to the nation’s editors on April 19, President Kennedy was asked about his attitude toward both price increases and wage increases in the steel industry. “Now I know,” he remarked in replying, “that there are important editorial interests in this country who really don’t feel that this is the President’s business.” He went on to contend that it was.

A little further clarification on this point would be useful. The President has as much right as any other citizen to say whether in his personal opinion a certain price is “too high” or a certain wage is “too low.” But he has no moral right to use his office to try to impose a particular wage increase or veto a particular price increase by vague threats of punitive action, especially when Congress has not given him the legal right. Nor is it wise for Congress and the President combined to try to fix particular prices or wages in a private industry.

No one knows precisely how many prices there are in the American economy. The OPA once moderately estimated the number at 9 million. This implies trillions of interrelations. Prices and wages are interconnected and interdependent, in a web of inconceivable intricacy. To change any one may be to affect a thousand.

DISCOURAGING STEEL

What is the effect, for example, if the government, by intimidation or law, prevents a price increase in steel? The steel industry is already sick. Its dollar volume of net profits in 1962 was the lowest in ten years. Its profit margin of 4.1 cents on the sales dollar was the lowest in seventeen years. In its return on net assets it tied for last place among 41 manufacturing industries. Consolidated employment in the industry was down 11,000 compared with 1961, and 169,000 compared with 1957.

Yet it is precisely in this industry that a very small price increase (averaging about 1 percent) is followed by front-page headlines and a special statement from the President. The effect of governmental pressure to hold down steel prices below the level to which market forces would bring them could only be to make the industry still less profitable, to reduce employment in it still further, to discourage new investment and expansion, to keep it smaller and sicker than it would otherwise be. (The U.S. share of world steel production declined from 46 percent in 1950 to 25 percent in 1961.)

It is an error to suppose that by holding down steel prices below the market level the President or government could hold down “the price level.” The general price “level” depends upon the amount of money and credit in circulation. If steel prices are held down arbitrarily, while the amount of dollar purchasing power is unchanged, the tendency must be for more of other things to be bought or for their prices to be pushed up.

DUTY OF GOVERNMENT

It is often said that steel prices enter into many other prices, and that a price rise in steel will be “pyramided” by fixed percentage markups on finished goods. It is true that users of steel will try to “pass on” any price increase, but it does not follow that competition will allow them to. Again it is the total amount of money and credit that will determine the outcome.

What, then, is the function of the government, and the “business” of the President? It is to maintain freedom of competition, and to refrain from inflation.

But as regards competition, the Federal government has applied a flagrant double standard. It is constantly attacking the steel industry for “monopoly,” though there are more than 275 individual companies in the industry, and though the U.S. since 1959 has been a net importer of steel. Yet the single labor union covering the whole steel industry owes its immense monopolistic bargaining power to Federal law.

And so, far from refraining from inflation, Mr. Kennedy is planning a deficit for this fiscal year of about $9 billion, and another deficit for fiscal 1964 of nearly $12 billion, and is opposing any serious effort to reduce or eliminate these inflationary deficits, either by reducing expenditures or maintaining present taxes.