A Slap for Steel, a Spur for Machinery

PRESIDENT NIXON changed his economic policy in two important ways last week. First, in a shift toward an expansionist policy, he gave a tax break to businessmen by allowing them to depreciate their plant and machinery faster. More surprising, the President, who has generally resisted personal intervention against either soaring wages or prices, swung toward greater activism by publicly condemning a sharp rise in steel prices and threatening to retaliate. The showdown fired emotions on both sides, not only because steel is big and basic but also because, in a celebrated confrontation in 1962, John F. Kennedy denounced the steelmen after they had raised prices and forced them to back down.

Snub for Nixon. Bethlehem Steel, the second-biggest domestic steelmaker, posted base-price increases of up to 12 1/2% on structural, piling and plate steel used to build skyscrapers, ships and rail cars. It was the industry's largest jump since 1957. On top of that, "Bessie's" managers made clear that more price hikes could be coming. They rescinded their policy, which the rest of the industry had reluctantly adopted, of guaranteeing that there would be only one price increase a year for any major product.

Nixon, obviously annoyed, hit back with his most severe censure yet of any company's price actions. Press Secretary Ronald Ziegler said that the President was "deeply concerned" over the "enormous" rises and suggested that the Government might allow an increase in "voluntary" import quotas, which now limit steel imports from Europe and Japan to about 12% of domestic production. Though the President did not call on Bethlehem to roll back its prices, the blast was a plain warning to other companies against similar action.

Undeterred, four small producers quickly and happily followed Bethlehem in kicking up prices. Bethlehem Chairman Stewart S. Cort, a gregarious salesman who has degrees from Yale and Harvard, pointedly snubbed Nixon. He said that he had "no plans to make any change in the new prices."

He will, as it turns out, have to reconsider. At week's end, front-ranking U.S. Steel Corp. decided to raise its prices by only 6.8% on the same products--an increase that the White House seems unlikely to find so objectionable. If Bethlehem is forced to back down, as is likely, Nixon will have won a considerable victory.

Other steelmen had greeted Bethlehem's price move as long overdue, but many of them were furious at the company for posting such a walloping increase, thus practically challenging Nixon to intervene. Cort had gone to Washington and given advance notice of the increases to Paul McCracken, the President's chief economist. But when the boosts were announced, Bethlehem had a lapse in public relations; the company did not even bother to take out some of the sting by immediately pleading its economic case in public.

Bethlehem still clings to many old-fashioned ways (top executives, including Cort, punch a time clock), but the company has lately become an adventurous swinger in its pricing practices. It shook up steelmen in 1969 by temporarily cutting sheet-steel prices to combat under-the-table price discounting. It also led the industry by raising steel prices by 5% in August 1968, July 1969 and February 1970. On two of those occasions, U.S. Steel countered by posting smaller increases, forcing Bethlehem to fall into line.

Help for Profits. At week's end this scenario seemed about to be repeated, as the Administration fervently hoped. In announcing its price increases, U.S. Steel took pains to note that they would increase its total revenues by only 1.2%. "Rising costs have continued to erode the company's profitability," the company complained, adding that by themselves the new prices will "do very little" to offset this squeeze. Nor did

U.S. Steel rule out a further price increase later this year if its workers win a substantial pay increase. "The price does not in any way compensate for future cost increases." the company noted. Like Cort, U.S. Steel Chairman Edwin Gott discussed the need to raise prices with the White House's McCracken before taking action. But they struck no deal. Gott did not say, and McCracken did not ask, precisely how large the increase would be.

As steelmen see it, they are caught in a serious bind. The industry's net income shrank from a peak of $1.7 billion in 1965 to $855 million in 1969; last year profits tumbled further because of the recession and the General Motors strike. Some economists figure that earnings dropped 35%, giving the industry a return of only 310 on every dollar of sales, one of the lowest in U.S. industry.

Chairman Cort last week belatedly defended his company's price package. Despite sales of about $3 billion, he said. Bethlehem earnings slumped by 40% last year to an estimated $90 million. Like other steelmen, Cort blamed part of the profit decline on major increases in the cost of raw materials, energy, transportation, taxes and labor. All this places the industry in a difficult position for competing with steelworkers overseas. The average hourly wage of a Japanese steelworker is only $1.50, compared with $5.80 for his U.S. counterpart. Japanese steelmen commonly keep their export prices at least 10% below the prices posted by American steelmen. Having built the world's most efficient steel industry, the Japanese are formidable competitors in almost every marketplace; they are even providing half of the steel for, Manhattan's rising World Trade Center, the tallest building anywhere.

Still, by seeking the protection of import quotas, American steelmen have weakened their case for higher prices. Since quotas were imposed in 1968, steel prices have been climbing sharply --12)% in the past two years. That compares with a 7% increase in the eight years of the Kennedy and Johnson Administrations, when presidential pressure hammered down the price rises.

Teeth for the Jawbone. Before U.S. Steel acted, there were many who doubled that Nixon would force any rollback. Last month the President criticized the oil industry for raising prices and expanded the import quotas for Canadian oil. Oilmen, however, stood pat on their increases. Some European steelmen last week discounted Nixon's threat to ease import quotas as a tactical bluff.

Nixon will probably relax the import quotas only as a last resort, for example if fat price rises spread to other lines of steel. The President can afford to bend a bit, but for the sake of his political image he could hardly allow steelmen a complete triumph. At Nixon's order, his Cabinet Committee on Economic Policy was to meet this week to consider what steps the Government might take before the price rises become effective March 1. The Administration is considering a switch from quotas to tariffs, which would theoretically allow unlimited imports of foreign steel. Such a shift, however, would require congressional approval. If it wished, the Administration could require that Government structures--offices, bridges, hospitals and high-rise housing--must be designed with more concrete and less steel.

However it ends, the steel imbroglio will increase the chances of a strike by 370,000 American steelworkers on Aug. 1. Despite U.S. Steel's view of the matter, the price rises will whet the union's appetite for a huge wage increase. On the other hand, profit starved steelmen will have good incentive to resist union demands. Considering these alternatives, the President may feel obliged to balance his slap at steel prices with efforts to hold down steel wages. Having sharpened the teeth of the once despised jawbone, Nixon can hardly refrain, in fairness, from using it in other economic areas.

Compared with the storm over steel, Nixon's tax moves created only a mild stir. Basically the changes cut 20% from the time over which businessmen may write off the cost of new equipment on their income tax returns. The effect is to give industry temporary interest-free loans for plant expansion, but they will work no sudden wonders in lifting investment. Reason: 24% of the nation's existing factory capacity is now idle. Businessmen plan to spend $82 billion for capital expansion this year, about 3% less in physical terms than during 1970. Presidential Economist McCracken estimates that the new tax incentives may add $1 billion to that total.

Toolmakers should be among the first to benefit; farm-machinery makers, airlines and chemical manufacturers also expect to cash in. 'The greatest effect will be psychological," says James Gavin Jr., finance vice president of Chicago's Borg-Warner Corp. "This shows that Government understands that investment must be spurred."

By the Treasury's estimate, the changes will cost the Government $2.7 billion in tax revenue during the next fiscal year. The tax deferrals fit Nixon's 1971 plan to accept big budget deficits to prod the lagging economy. Over the longer run, the Administration counts on the changes to raise federal tax collections by increasing industrial expansion, which in turn will create new jobs.

All together, the events of last week made clearer the outlines of Nixon's new economic policy for the immediate future. It involves greater emphasis on economic expansion, to be achieved mainly by pumping more money into the economy. And to fight inflation, it calls for more presidential action to bring down prices where the Government itself, as with import quotas, is helping to prop them up.

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