Questions to debate

No other industry has had such strained relations with Washington as the steel industry. From the violent strikebreaking of the '30s to Harry Truman's short-lived take-over of the entire industry, from Estes Kefauver's investigations of pricing practices to John Kennedy's fiery outburst against the industry's leaders, steel and the Government have often been at odds. Both sides have mellowed a good deal of late, but they are far from becoming kissin' cousins. Last week the Government issued a report that raised the hackles of the industry and is sure to be a center of debate in the months ahead.

With the threat of a steel strike postponed until at least Sept. 1 by an interim pay increase of 2.6% to workers, Lyndon Johnson took advantage of the lull in bargaining tension to make public the findings of a four-month study made by Otto Eckstein, a former Harvard economics professor who has been a member of the Council of Economic Advisers since last September. The steel industry, said the 64-page council report, can afford to raise wages 3% this year without boosting its prices. "The prosperity and stability of the whole economy," added the President, require such a noninflationary settlement of steel wages, plus "continued stability of steel prices."

A Short Delay. The White House delayed issuing the report until the interim wage settlement had been hammered out, clearly meant it both to keep wages within the Administration's 3.2% productivity guideline and to head off any notion the steel industry might have of raising prices to compensate for higher wages. Neither management nor labor seemed to like the findings. Dave McDonald grumbled because the Government set up productivity as the sole gauge of wage hikes, said that negotiations for both sides had long used about 13 other measures. Roger Blough, chairman of U.S. Steel, voiced his views the-day the report came out and before he had seen it. At Big Steel's annual meeting, he called profits "unsatisfactory" and insisted that rising production costs constituted "a threat to steel's competitiveness."

Beyond the" effect it is bound to have on negotiations between now and the new Sept. 1 strike deadline, the report raised some broad and fundamental questions about the industry, its health and its relations with Government:

> Is steel gradually becoming a quasipublic utility? Some steelmen contend that the recurrent jawbone pressure to hold the price line effectively regulates their ability to change prices in a free market, actually leaves them worse off than a rate-regulated industry because steel enjoys no monopoly, has no guaranteed rate of return. The White House, naturally, talks softly of its powers over the steel industry, pointing out that they are, after all, merely persuasive. The persuasion, however, can be extremely effective.

> Is steel really a bellwether industry on which the fate of the U.S. economy depends--and therefore one that requires close government watch? The White House report notes that steel is an important cost ingredient in 20 major industries, bulks three times as large as all metals combined in total industrial production. Steelmen feel that the economy no longer stands or falls on steel's activity, point out that their industry now accounts for only 2% of national output and corporate sales, less than 2% of corporate assets. Aluminum, plastics, glass and cement have made such inroads into steel's markets that steel's weight in the Federal Reserve index of production has fallen one-third, from 7.8% to 5.2%.

> Are steel profits being realistically measured? Steelmen point to their 9.2% return on investment, which places steel 35th in profitability among manufacturing industries (which average a 12.7% return). In its report, the council used a yardstick by which many Wall Street analysts now measure a corporation's health: the cash flow. Cash flow includes not only profits but also untaxed money retained because of depletion allowances and depreciation write-offs, which are paper rather than real costs. By this standard, the steel industry earned a better-than-average 18% on its equity-last year. Reason: steel's huge capital investments yield bigger-than-average tax credits.

Too Busy to Wait. These questions will long be debated, but the industry is too busy right now to wait for the answers. Steel shipments are headed for a 51 million-ton record in the first half of 1965, and the industry is pouring money into a $1.9 billion modernization program. The program is centered around Chicago, where seven major steel companies have built new plants or greatly expanded old ones. Though imports still plague the industry--they were almost double steel exports last year and are heading higher--a couple of ideas from abroad have helped. Five U.S. plants now use continuous casting, a European process that promises sharp reductions in steel costs; ten more are under construction and another 20 are planned. As for basic oxygen furnaces --the Austrian process that has already made steel production faster and cheaper--the U.S. steel industry now has 28, is building or planning 48 more.

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