Steel as Scapegoat

May 24, 1965

Instead of keeping hands off the wage negotiations in the steel industry, the Administration has in effect said what it thinks the settlement ought to be. On May 4 President Johnson and the Council of Economic Advisers implied that in their opinion the steel industry could give its workers a 3 percent increase in wages this year and still not need to raise its prices. Their action can only encourage the steel union to raise its demands. The Administration has set a mischievous precedent.

Both the statistical comparisons and the economic reasoning in the council’s report on the steel industry are highly questionable. The steel industry has been arguing that since 1957 its labor costs have increased more than 4 percent a year while productivity has increased only 2 percent a year. The council, by not counting periods when strikes occurred (a method it has not applied to other industries), has figured that the steel industry’s productivity has really risen 3 percent a year.

A number of questions arise concerning the government’s “guidepost” calculations. There can be no doubt that hourly labor costs have risen faster in the steel industry than prices. Since 1959 steel prices have risen on the average about half of 1 percent. (Consumer prices have gone up more than 7 percent.) Hourly steel wages have risen 11 percent. Total hourly employment costs have risen 15.6 percent. The government holds, however, that “labor productivity” has gone up by 3 percent a year and therefore hourly wages should go up 3 percent a year.

LABOR PLUS CAPITAL

Even if we accept the 3 percent figure, there are several things wrong with this reasoning. What the government is talking about is not in fact “labor” productivity; it is labor-capital productivity. This has been going up each year not because workers constantly work harder, but because more and better plant and equipment are constantly being supplied. If the whole gain in productivity that results is given to labor, then the incentive to further investment will be destroyed, and economic growth will slow to a halt. In a free market, wages depend on marginal labor productivity. This is a very different thing from average labor-capital productivity.

This is only one of the confusions of thought on which the CEA’s “guideposts” are based. Another is the council’s use of averages. Hourly wages in all manufacturing industries average $2.60. But in the steel industry hourly wages average $3.41 (and with fringe benefits, $4.39). Should wages in every industry go up just 3 percent a year, no more no less, regardless of existing differences, or of changing demand, prices, and profits in each industry?

PROFITS MODERATE

The council deplores the rise in steel prices, especially during the 1950s, but ignores the rise in wage costs that made price increases necessary. If steel price rises were disproportionate, they would be reflected in high profit margins. But the compilations of the First National City Bank of New York show that in 1964 the steel industry’s profit margin per dollar of sales was 6 cents, compared with an average of 6.1 cents in all manufacturing. In 1964, the steel industry earned only 9.2 percent on net worth compared with an average of 12.7 percent in all industry.

The total market value in 1964 of the nation’s steel output was only 2.6 percent of the gross national product. The whole attempt to pick on steel prices as the scapegoat for inflation is not only absurd in itself but draws attention away from the real cause of inflation, which is the constant increase in the money and credit supply brought about by the government’s own policies.

If the steel industry could really grant a 3 percent rise in wages without increasing prices, it would be equally true that if it did not raise wages it could lower its prices. And lower prices are needed to enable it to compete more effectively with foreign steel.

The assumption of government officials that they know just how much every wage and price should or should not go up can only lead to constant meddling and finally to totalitarian wage and price controls that could halt the growth of the economy.