62. Memorandum From the Chairman of the Council of Economic Advisers (Schultze) to President Carter 1

SUBJECT

  • Upcoming Report on the Steel Industry from the Council on Wage and Price Stability (CWPS)

This memo supplements our phone conversation on Tuesday afternoon.2

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On August 5, after a large steel price increase, you directed CWPS to prepare a report on the industry.3 You asked for that report by September 30.

Preparation of the report is in its final stages. I have not yet seen it, but Barry Bosworth (CWPS Executive Director) has briefed me on its emerging contents. The report is factual and analytical and makes no recommendations. But it is a hard-hitting report, and no matter how diplomatically written, the facts and analysis will step on a lot of toes—industry, labor, and government. (See below.)

The CWPS authorizing law expires September 30. A 2-year extender has passed the Senate, but has been hung up in the House because of Andy Biemiller’s4 opposition. We finally worked out arrangements to speed it thru by Friday.5 But publication of a controversial report might hang it up.

Bosworth will hold up delivery of the report until sometime next week, after passage of the CWPS extending legislation.6

You may want a further delay until after your meeting with steel management and labor which is now being arranged for the very near future.7 Upon receipt, you can announce that you are referring the report to the task force or other group that will be established to prepare recommendations for you on government policy toward the industry.

Some Examples of Tentative Findings to Date

1. Operating costs in the U.S. steel industry have grown far more than the average for other industries.

• Between 1967 and 1977 average wages in the U.S. economy rose 97 percent—steel worker wages rose 142 percent, and coal wages (coking coal is an important cost) rose 124 percent.

• Most of the earlier U.S. competitive advantage in raw material costs has been lost; sharp improvements in shipping costs have reduced the disadvantage to the Japanese of buying U.S. coal.

2. Technologically, new U.S. steel facilities are not inferior to other countries. But U.S. construction costs have risen very sharply, which increases the costs and lowers the potential profits from steel modernization investment. Japanese construction costs are much lower and the time it takes to construct a new plant far less.

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3. Environmental, health and safety regulations have been a significant factor in raising U.S. steel industry costs, but other countries are doing as much or more. It is hard to blame a deterioration of the U.S. competitive position vis-a-vis the Japanese on environmental, health and safety regulations.

4. A reduction of imports to historical levels—say 1969–71 (the earlier voluntary restraint period) or the last five-year average—would not significantly improve domestic industry sales. The main way it could “help” the industry is to permit a rise in prices relative to costs.

5. The cost advantages of Japanese producers (without subsidy) are sufficient to allow them to underprice American steel producers within significant parts of the U.S. market without selling below cost. The opposite is true of European steel makers. (These conclusions have important implications for the dumping cases against European and Japanese steel firms now in the courts.)

I intend, of course, to review the CWPS draft closely. But no matter how carefully worded, the publication of a dispassionate examination of the facts will arouse a great deal of critical reaction.8

  1. Source: Carter Library, Staff Office Files, Council of Economic Advisers, Charles L. Schultze Subject Files, Box 81, [Steel] [7]. No classification marking. A stamped notation reads: “The President has seen,” and Carter wrote at the top of the page: “Charlie—If report is accurate, let criticism come. J.C.”
  2. Carter did not speak to Schultze by telephone on Tuesday, September 20, or Tuesday, September 27. Carter and Schultze did speak by telephone on Monday, September 26 from 11:33 until 11:35 p.m. (Carter Library, Presidential Materials, President’s Daily Diary) No memorandum of conversation was found.
  3. See footnote 7, Document 47.
  4. Andrew Biemiller was, as Director of the Department of Legislation, the principal lobbyist for the AFL–CIO.
  5. September 30.
  6. Carter wrote “ok” in the margin adjacent to this paragraph.
  7. Carter underlined the phrase “further delay” and wrote “no” in the margin adjacent to this sentence.
  8. The CWPS report on the steel industry was released on October 7. (Edward Cowan, “Steelmakers Cited As Inflation Source,” The New York Times, October 8, 1977, p. 29)