Price Control by Warning

April 29, 1963

The President’s statement on the steel price increase this April was very moderate compared with that of last April. But even this year’s statement contained many ambiguities and left some crucial questions unanswered.

The first unanswered question was this: at what point would “selected” price rises, “prompted by changes in supply and demand,” which the President would tolerate, become “across-the-board” increases which he would not?

The total quantitative effect of the new steel prices on prices paid by the consuming public will probably be trifling. The price increases so far announced, which range from about 3 to 5 percent, apply to less than half the output of steel. The increase for all steel products appears to average about 1 percent. The industry’s output is in turn valued at 2½ percent of gross national product. A rise of less than 2 percent in a product that itself accounts for less than 3 percent of GNP hardly constitutes a national crisis.

Yet such a price rise can be very important to the steel industry itself. There has been no net steel price increase since 1958, though there have been five increases in steel wages raising wage-costs some 50 cents an hour. The industry’s dollar volume of net profits in 1962, at $567 million, was the lowest in ten years. Its profit margin on the sales dollar was 4.1 percent, the lowest since 1945. In its return on net assets it ranked 40th among 41 manufacturing industries. The three largest companies slashed their dividends. Five companies reported net losses. Employment in the industry dropped 13,000 compared with 1961 and 103,000 compared with 1957.

NO LEGAL BASIS

Yet the President declares that he is “interested in protecting the American public—and it is the American public which would suffer most from a general increase in steel prices.” How can the American public benefit, in either security or employment, from a sick steel industry?

And what does the President mean when he warns the steel industry that a price rise would “aggravate their competitive position” and be against “their own enlightened self-interest”? Is he implying that he knows better how and where to set prices than do the people in the industry?

The most ominous assumption in Mr. Kennedy’s statement and actions this year, as last, is that he has the legal and moral right to tell the steel industry, or any other, just when, where, and how to set its prices. The whole procedure is without sanction of law. It is government by whim, by personal displeasure, by vague threat of punitive action, a menace to the whole concept of the rule of law.

FREE MARKETS DECIDE

It is also selective and discriminatory price-fixing, without the explicit general standards that legal price-fixing would have to set. The President postpones a trip to Florida to issue a statement on a 2 percent increase in the price of steel, but is silent on a 100 percent increase in the price of two New York morning newspapers. Government officials last year announced “guideposts” which indicated that prices should be frozen where they were but wages could rise about 3 percent a year. Then the government this year stepped in and settled the East Coast dock strike by ordering a wage rise that knocked down even its own guideposts.

This does not mean that overall legal price- and wage-fixing would be preferable. All government price- and wage-fixing tends to reduce, distort, unbalance, and disrupt production. The whole attempt to set up price- or wage-fixing “guideposts” is economically nonsensical. The only solution to this infinitely complicated problem is free competition and free markets.

The President’s expressed reason for his concern about steel prices is to head off “another inflationary spiral.” But the real threat of inflation today comes from the policies of the Administration itself—from unparalleled spending and planned deficits. As long as the government keeps pumping more dollar purchasing power into the economy, prices and wages must rise.