The President has proposed a constructive and comprehensive program aimed at controlling inflation and he has assigned a number of key areas of responsibility to the Council on Wage and Price Stability. It would hardly be productive to support the basic thrust of the President's program and then deny him some of the key resources which he believes are required to make it effective.

Therefore, we support the President's request for a 2-year extension of the life of the Council and a modest increase in its appropriations. We also believe the other, more technical provisions of S. 1542 merit support. One significant aspect of these changes involves a recognition of the importance of confidential treatment of data submitted to the Council by business and other organizations. Much of the information which the Council is empowered to secure from business-like costs, inventories, or orders-could indeed do considerable damage to the competitive posture of a business if it came into the possession of a competitor. We welcome the changes proposed to S. 1542 to strengthen and improve the language in the act requiring the Council to maintain the confidentiality of trade secrets and other confidential business information.

Members of the committee will also recognize, I am sure, that our views in support of S. 1542 are presented with some sense of caution. We are not yet in a position to assess the impact which the President's plan to reorganize the Executive Office of the President will have on the Council and its activities. Similarly, we are not yet able to gage the effect which a new Director will have on the thrust and direction of the Council's activities. We would like to suggest that the committee itself may want to weight these factors before making a recommendation with respect to this legislation. We would also like the opportunity to submit an additional statement if our assessment of the impact of these impending changes results in some revisions in our

views.

I would be glad to respond to any questions you may have.
The CHAIRMAN. Thank you, Mr. Peloubet.

Mr. Peloubet, four times in your statement your refer to something like underlying causes, the real causes, the fundamental causes of inflation.

On page 1 you say moderating the underlying causes of inflation; on page 2 you talk about the fight against underlying causes being neither widely understood nor acknowledged. On page 3 you talk about ignoring the real causes of inflation. And on page 4 you talk about the fundamental causes of inflation.

But at no place do you identify what these causes of inflation are. It is hard to solve a problem without knowing what the causes are. Can you help us by identifying in your view or the Business Roundtable's view the major causes of inflation?

Mr. PELOUBET. Mr. Chairman, I think that a good deal of the discussion that went on this morning indicates that there are a variety of things which contribute to it, and that the way in which each of these pieces fits together is not known to us with any preciseness.

But I guess I would like to reserve comment on that and give you a statement back at an appropriate time, after I have had a chance to think that through properly, if that would be acceptable.

The CHAIRMAN. I'm sorry, what was that last part?

Mr. PELOUBET. I would like to answer that question with a written. statement later, if I might do that.

The CHAIRMAN. We would appreciate that, because I think it is very important in moving in this area to know precisely what we are talking about.

Mr. PELOUBET. I agree.

[The following information was received for the record:]

SUPPLEMENTAL STATEMENT OF MR. PELOUBET

Mr. Chairman, as Drs. Reese, Houthakker and Bosworth indicated in today's panel discussion, the issue of price stability must be understood in the context of the other goals of full employment and economic growth. In the context of this multi-goal approach, the causes of inflation are seen as both many and complex. If, however, we abstract for a minute from the rising wages and prices, which are merely the symptoms of inflation, to what I have termed the "underlying causes" of inflation, we will see that they fall into two categories: macroeconomic and microeconomic.

The macroeconomic causes of inflation can be directly related to fiscal and monetary policy. The overly expensive fiscal policies of the last decade have and still continue to take their toll on the economy. The Federal Government has been in deficit in every year in the past decade except one. At the same time, the growth in the money supply has exceeded overall economic growth, with the net result being that the fiscal deficits the Federal Government has been financed by the printing of money and hence infiation.

The situation we face today is one wherein the public's expectations of price increases have risen substantially in the past decade. Such expectations which are built into wages, prices and even government budgets can be lowered only by initiating a long run goal of stable fiscal and monetary policy. President Carter is to be commended for his goal of balancing the budget by 1981 as is the Federal Reserve's goal of stable monetary growth.

In the last few years, the importance of microeconomic factors in inflation has grown substantially. The rapid acceleration of Federal intervention into the marketplace has caused substantial increases in the costs of providing goods and services.

While we wholeheartedly support many of the goals of this new federal intervention such as safer working conditions, reducing environmental pollution, and assuring better products for consumers, the costs of these regulations ultimately get in the economy's price level.

Major contributions can be made to slowing inflation by insisting that the benefits of such regulations at least match their costs. The economic impact statements prepared by COWPS go a long way in helping to achieve this goal.

Another microeconomic area which has made significant contrbutions to inflation is market intervention. A good illustration of the contributions to inflation made by this area is milk price supports. The Council on Wage and Price Stability has estimated that supporting milk prices at 80 percent of parity would cost taxpayers and consumers more than $900 million over the coming year. The resulting rise in the price of milk products induces consumers to cut back their purchases with the surplus being purchased by the government. The bottom line is that the consumer pays a higher price for less milk.

The above example is only one of a host of instances where Government actions directly stimulate inflation.

In short, a conscious effort by Government to stabilize fiscal and monetary policy, evaluate the true economic costs of regulation and market intervention, and stimulate capital investment, which is directly responsible for increased productivity, would be an effective beginning for promoting the inflation free, full employment growth which we all desire.

The CHAIRMAN. You indicated the members of the Business Roundtable are opposed to prenotification of major wage or price increases, whether voluntary or mandatory.

The pricing decisions of major companies have far-reaching effects on all sectors of the economy, not just the sector they operate in.

That is evident in steel, where there is a cascading effect. This has to be recognized and considered at the time price decisions are made.

How can we assure that that will happen, if there is no opportunity for the President or the Congress or the public to know in advance so some action can be taken to forestall unjustified price increases?

Mr. PELOUBET. Well, I would argue that they could be put into the marketplace, and dealt with after they are in the marketplace, in the sense of seeing whether the price increases are maintained, or whether they are withdrawn, but that the free marketplace will provide the opportunity to see whether in fact they are justified.

The CHAIRMAN. Well, supposing the marketplace can take it, because it is going to accept it, but you still have a situation where the increase may not be justified, in relationship to the cost and certainly the effect may be inflationary.

For example, you may have a situation where you could-I don't like to belabor the steel situation-but you may have a situation where it is possible to have a substantial increase in the price of steel, perhaps. The market might take it. Is that the only test? It is not justified in terms of cost, it has an inflationary effect, but because of the international situation, and because of the domestic situation, the marketplace would take it. In that case they go ahead with a big increase, and the marketplace wouldn't correct it.

As a matter of fact, if the marketplace could handle it, we wouldn't have to have any of this.

Mr. PELOUBET. Broadly speaking, perhaps that is true. But I think the marketplace is the best answer.

[Mr. Peloubet submitted the following information:]

The marketplace continues to provide the most accurate and efficient medium for determining the justification of wage and price increases. Prenotification and the concomitant hearings and approval which accompany it undermine the workings of competitive markets. It places government officials in the position of regulating private business decisions, and adds unnecesary costs to the economy through government bureaucratic growth and additions to the already weighty government associated costs of doing business.

The requirement that price increases be justified on a cost basis creates cost— plus pricing and cost-plus management. There would be little incentive to hold down costs and efficient use of scarce resources is abandoned under such regulations. In fact, the Government's own experience with cost-justified pricing demonstrates the inherent failures of such policies.

In fact, cost justification of wage and price increases are both inaccurate and inappropriate.

Mr. Chairman, you have said two very interesting things. First, prenotification would place the Government in "a position to intervene" and second, it is concentrated unions and businesses which should be the subject of fact-finding.

Advocates of prenotification have long implied that some form of intervention would be a necessary adjunct to prenotification. Such intervention, of necessity, must have some rules, and with this, we are now back to guidelines and controls. With respect to concentrated business and price increases, there is little economic evidence to support the contention that concentration breeds inflation. In fact, a study by Professors J. Fred Weston and Steven H. Lustgarten, of UCLA and City University of New York, respectively, demonstrates that the higher the level of concentration, the smaller the increase of prices. The reason for this conclusion is that concentrated industries have greater labor productivity which is caused by greater capital intensity.

Further, antitrust policies already exist for combatting the concentrationmonopoly wage and price increases you suggest exist.

Mr. PELOUBET. But another answer to that is the kind of communication which has been discussed this morning, where in the absence of a

formal prenotification, there would be dialog between business, labor, and Government, which would be indicative of a trend in which pricing might be going. That sort of low key dialog could lead to a situation where there is understanding of the forces which would lead to such price increases and could possibly change the course of those events if that was warranted.

The CHAIRMAN. When I refer to prenotification of wage or price increases, what I am talking about is not something proposed by liberals or by labor. Labor doesn't want this. The man who suggested this to the committee was Arthur Burns. I have asked him several times since he suggested it 3 or 4 years ago and he still maintains we ought to have prenotification. If you have 30 or 45 days, you could be in a position then to intervene in a way that could be effective. You could have a fact finding, and determine the increase was justified in the concentrated unions and businesses that might have some force.

Mr. PELOUBET. I think what comes to mind is whether the fact finding operation in that period of time could truly determine whether the price increase is warranted or not.

We have some cases on record, one with our own corporation, where there was an investigation

The CHAIRMAN. Industry would be called upon to make the data available.

Mr. PELOUBET. I guess what I am suggesting is the interpretation of data might be open to question. If in fact the price increase is put into the marketplace, this in effect becomes a better test.

The CHAIRMAN. I am glad to see the emphasis you put on productivity. I think that is highly constructive and is a big element in counteracting inflation.

You mentioned investment tax credits to encourage productivity, but it is difficult to insure such credits will lead to productivity increases. What other methods of stimulating renewed growth in production has the business community discussed?

Is the Roundtable working on this problem?

Mr. PELOUBET. I am not aware specifically of any activity in the Roundtable directed toward productivity. We just discussed this a minute ago here. And we can find out about that for you.

But I think there are some aspects of tax reform which should be mentioned. Certainly one is the possibility of significantly reducing depreciable lives to encourage direct investment in capital facilities. We would see that as going arm in arm with the investment tax credit as being useful for capital formation.

[The following information was received for the record:]

While we believe that education and training are responsible for productivity increases, and we support programs along these lines, there can be little doubt that the major cause of productivity advances is capital investment. It is no coincidence that worker productivity fell from 2.4 percent in 1965-1970 to 1.0 percent in 1970-1975 while the growth rate in plant and equipment per worker fell from 2.6 percent in 1965-1970 to 1.6 percent in 1970–1975. The reason for the failure of productivity to continue at historical rates in the last few years is the slackening of capital investment.

The CHAIRMAN. Cooperative collaboration among business, labor, and Government has been mentioned as a key element in beating inflation. Some people feel we may have the beginning of that in what we discussed, the Meany-Jones-Dunlop operation. That method has

paid high dividends in Germany, where they have what they call concerted action. It might not work in this country because our market system is not yet made up of giant cartels. Can you really envision a cooperative program working to hold down prices and wages?

Mr. PELOUBET. I think the first step is the matter of communication. Just recently the acting director of COWPS, Mr. Crandall, came to Union Carbide and we had discussions that were useful on both sides of the house. I think perhaps he learned something about the kind of business pressures we are under, and we certainly learned something about the kind of information he feels is useful and necessary.

It is that sort of thing that we envision as the purpose of the Dunlop committee, to begin to have some better understanding about what we get out. The key word in my mind is credibility, if we can begin to establish some credibility between the three sectors and some confidence.

There were negative words used here this morning, like fear of losing jobs, concern, those kinds of thoughts. If we can turn that around and begin to have some credibility and understanding through communication, I think that can be helpful.

I think that also goes hand in hand with the point we made in our paper, which is that beating inflation is a day-by-day situation.

The CHAIRMAN. Is this something the Council on Wage and Price Stability can get into more? Can they be more active in setting up meetings and cooperation between labor and management?

Mr. PELOUBET. That is quite possible, I think.

The CHAIRMAN. You commend the President's plan to require full consideration of economic costs of major Government regulations with more effective analysis of their economic impact.

Why shouldn't business be responsible for filing such economic impact statements prior to any final action they may take that would tend to be inflationary?

Mr. PELOUBET. You are asking that question with specific regard to pricing, for example?

The CHAIRMAN. That's right.

Mr. PELOUBET. I guess the basic answer to that is again that in the business world there is an automatic cost-benefit indicator, which is the bottom line (i.e. net income) and this tends to provide a controlling element for us at all times. In the Government sector, a cost/benefit report card on operations is just not normally available. As a matter of fact, the kinds of cost-benefit analyses that we are talking about here are used to a considerable extent within business in its operations particularly in terms of capital investment.

The CHAIRMAN. How it might affect-I am thinking now about how it might affect the public interest.

Mr. PELOUBET. Right.

The CHAIRMAN. That kind of detail I think would be helpful. Well, thank you very much, Mr. Peloubet, we appreciate very much your position. You support the legislation?

Mr. PELOUBET. Yes, sir.

The CHAIRMAN. Do you have any feeling about whether or not the President's proposal to keep the staffing at its present size is right, or do you think the legislation which provides for an increase of 10 positions, 10 professionals, is preferred?