remains that it is profit control, the denials and protestations of price administrators notwithstanding.

Since profit control comes about through the making of ceiling price adjustments conditioned on a profits test, it is obvious that a system starting as straight price control gradually acquires an admixture of profit control as the adjustment process develops. The tempo of this transition depends primarily, of course, on the trend of basic production costs. If these continue to move up rapidly, they necessitate widespread and recurrent ceiling price adjustments, and the transition is accelerated. If the general level of costs is stable, many of the original ceilings can stand for a long time, and the transition is correspondingly retarded.3

PRESENT ADJUSTMENT STANDARDS

That the profits test is to be basic for industry-wide ceiling price adjustments under the present control was early made evident by Mr. Eric Johnston, Economic Stabilization Administrator, in his directive of April 21, 1951, to Price Administrator Michael DiSalle, from which the following is quoted:

"With the impending completion of the interim phase of price-control operations, it becomes necessary to establish longer-range policies under which price controls henceforth will be administered. * * * The basic policy shall be to allow no price increase above the levels set by interim regulations except to the minimum extent required by law, or for exceptional reasons of public policy. * * * The basic standards reflecting the minimum requirements of law (apart from certain farm and food commodities) shall be as follows:

"(1) The level of price ceilings for an industry shell normally be considered 'generally fair and equitable' under the Defense Production Act if the dollar profits of the industry amount to 85 percent of the average for the industry's best 3 years during the period 1946-49, inclusive. The profits should be figured before Federal income and excess profits taxes and after normal depreciation only, with adjustments made for any changes in net worth.

"(2) Any increase in manufacturing or processing prices may not be passed along at distributive levels except to the extent necessary (2) to meet the above earnings standard; or (b) to prevent dislocations in the relationship between costs and ceiling prices; or (c) to avoid serious hardships or inequities or to preserve enforceability. Any such increases shall not, in general, exceed the actual dollars-and-cents rise in costs."

This directive makes it perfectly obvious that save for "exceptional reasons of public policy" and save for the two minor relaxations applicable to distributors' prices noted in (b) and (c) of paragraph (2), eligibility for industry-wide ceiling price adjustments depends primarily, if not indeed wholly, on the test of profits. If the profits of the applicant industry are more than the standard prescribed, relief will be denied; if they are less, it may be granted, but only to the extent required to produce the standard profits.

ADVANTAGES OF HONEST LABELING

If price control really becomes a combination of price and profit control when ceiling prices are adjusted by reference to a profits standard, there may be advantages in an honest recognition of the fact. There should be, indeed, substantial advantages. For if it is acknowledged by the price administrators that they are in the business of profit control there is a chance that they will do a better job of it than if the pretense is maintained that nothing of the kind is going on. With such a frank acknowledgment of the facts, it will become apparent at once that there can be only one acceptable standard for the application of the profits test. Industry price adjustments should be granted whenever the industry as a whole is making less than a fair and reasonable profit, the adjustment being calculated to restore such a profit.

If we accept this standard, we have next to examine the profits test set forth above. Is 85 percent of the profits of the three best of the 4 years 1946-49, adjusted for subsequent net worth changes, a satisfactory measure of fair and reasonable profits on today's business? In some cases, yes, but in general, no.

Even if the 85 percent limitation had any justification-which in our opinion it does not- -a base-period earnings test would still be unacceptable for general Another factor affecting the frequency of ceiling adjustments is the level and trend of production itself. If, for example, economic activity is depressed prior to the imposition of price control and expands subsequently, the realization of volume economies may retard, or even obviate, some adjustments. If, on the other hand, control is imposed at a time of high-level activity, further expansion may entail inefficiencies which intensify the need for relief.

application. The earnings of the base period are themselves too often abnormal, and even when they are not, subsequent changes in the character and operations of the industry frequently make them a bad measure of reasonable earnings today. As anyone with experience in excess profits taxation will confirm, it is impossible to use a base-period earnings standard with any semblance of equity unless it is hedged with an elaborate structure of alternatives, adjustments, and relief provisions. Even then, the result is barely tolerable. To take such a standard minus these necessary ameliorants (save for the net worth adjustment) is to prescribe a strait-jacket certain to develop innumerable distortions and injustices in application. As a test of fair and reasonable profits under the conditions of today, it is a snare and a delusion.

To say so is not to condemn this formula alone. It is rather to deny that a generally applicable formula for fair and reasonable profits can be written. From this denial it follows that the single-formula approach to the determination of fair profits should be abandoned. The circumstances of different industries are so diverse, and the factors to be appraised are so complex, that it is better in the end to rely on a consensus, or even an average, of informed judgments. Fallible as expert judgment may be, we believe it is far more likely than Mr. Johnston's formula to arrive at reasonable results.

EXCESSIVE USE OF THE PROFITS TEST

We do not deny that if we are to have price control-whether we should have it is not considered here-it is impossible to administer the ceiling price adjustment phase of the operation without taking profits into account and without engaging in profit control. Under these circumstances it follows that administrators are not properly subject to criticism because they practice profit control, but only because they do it badly. One way to do it badly is to prescribe the profits test where it does not belong.

The use of a profits test for market-wide or industry-wide price adjustments is in general unobjectionable, provided, of course, that the test itself is satisfactory, but its use in individual adjustments (adjustments for a single company) is another matter. When we ask what is a reasonable rate of profit for an industry as a whole we have a question on which informed judgments will usually fall within acceptable limits, but this is not so when we ask what any particular member of the industry should make. Ordinarily, the profit rates of individual members scatter all over the scale from high to low, depending on their relative efficiencies and other factors. Since this dispersion is normal, a reasonable rate of profit for a given company is not to be confused with the rate appropriate for the industry collectively. If any general definition is possible, a reasonable rate for the company is whatever it can make in competition with an industry that is itself making a reasonable profit profit. This may be twice the industry rate, or it may be nothing.

It follows from this definition that if the ceiling price for the industry as a whole yields a fair industry profit, an individual company cannot properly claim price relief merely because its own profits are low. They are still, by definition, fair profits. To put it otherwise, if industry-wide ceilings are kept at all times in proper adjustment, relief to individual companies because of unreasonably low profits is theoretically excluded. This is not to say, of course, that no individual relief should be given for other reasons. It may be, for example, that the production of the particular company is indispensable, and must be preserved even though it takes more than a competitive (hence fair) profit to preserve it. It may be, to take another example, that the ceiling price of the individual company is for some reason under the market and needs realignment. As every price controller knows, there are a thousand circumstances and conditions that make individuals relief necessary, but their very diversity means that such relief must be variously justified.

These observations lead to a consideration of the test that is now in effect for these individual ceiling price adjustments. Like the test for industry-wide adjustments, it turns on the profit position of the applicant. There is, however, this difference: While an industry as a whole is eligible for relief when its profits are below 85 percent of the average of the best 3 years of the 1946-49 period, adjusted, the single producer is eligible (we are referring here to the manufacturing regulations) only when he is operating at an over-all loss. Moreover, if he can

See, for example, section 43 of the general manufacturers regulation (No. 22), or section 41 of the regulation for machinery (No. 30). It was originally required that profits from the manufacturer's entire operations must be negative, but this was subsequently amended to apply to profits from the separate plant or factory producing the article or articles for which ceiling price relief is requested. This relaxation was accompanied, however, by the disallowance of certain costs in reckoning profit on a separate-plant basis.

qualify on this basis, he must prove that the relief asked for will not create an over-all profit, but will merely restore his operations to "a break-even position." Here is not only a profits test in the wrong place; it is a test of almost incredible irrelevance. For it conditions eligibility for relief, not on the applicant's profit from the product or products for which adjustment is asked, but rather on the profit from his entire business (or plant), including perhaps scores or hundreds of other products. If the irrelevance of this test is incredible, so also is its severity; no relief will be granted which promises to result in any profit whatsoever.

THE HOLD-THE-LINE FIXATION

Many will marvel that reasonable men can bring themselves to impose, even provisionally, the profit standard just described. To understand this phenomenon, it is necessary to take account of the psychology of price control.

To the average citizen the objective of price control is of elementary simplicity: to prevent an increase in the cost of living. Sophisticates may interpret this more flexibly, as the prevention of unwarranted or improper increases, but to the man on the street it is just the prevention of increases, period. His views find powerful reflection, naturally, in the attitude of politicians, and become quite as naturally a mandate to the price administrators. Almost inevitably, “holding the line" becomes the supreme good, and is pursued as an end in itself with all the fanaticism of Horatius at the bridge. Inevitably also the success of the operation comes to be judged almost wholly by how much the line is allowed to move. Good control is identified with rigidity.

In this environment the administrators are under a powerful compulsion to hold upward price adjustments to an absolute minimum regardless of equity. This means that whenever basic production costs rise (wage rates, raw material, prices, etc.) there is a strong temptation to grant less than compensatory ceiling price adjustments, if any, and to delay as long as possible whatever relief is finally given. One way to accomplish this result is to impose highly restrictive standards for eligibility for relief. The profits standard for individual adjustments is a case in point.

THE RATIONALE OF PROFIT SQUEEZING

Present control authorities have been quite frank in warning business that it must be prepared for enforced "cost absorption" when it comes in for ceiling price relief. If this meant merely that industries now making more than fair and reasonable profits will have to absorb further cost increases before they become eligible for price relief, it would be unobjectionable, but this is not, apparently, what is meant. Rather, the authorities seem possessed of the idea that in the interest of hold-the-line price policy business must be prepared to absorb even cost increases that reduce profits below a fair and reasonable level. The implication is that a certain amount of profit squeezing the amount to be determined, of course, by the authorities-is to be imposed on business as an involuntary contribution or sacrifice in aid of the stabilization program.

If such profit squeezing is condoned on the ground that it is good politics, we can understand the position even though we deplore it, but when rationalization is sought on other grounds, we become profoundly skeptical. So far the authorities have not to our knowledge made any real attempt to rationalize their stand at all. Instead they have apparently relied on the willingness of the public to take its propriety simply for granted. It is an interesting, if disturbing, sidelight on the spread of Marxian attitudes toward profits over the last couple of decades that a favorable public reaction to profit squeezing can be so confidently anticipated. We are old-fashioned enough to believe that business profits are in general just as essential and just as morally valid a form of income as wages and salaries, or the earnings of farmers, and we see no moral justification in taking advantage of their political vulnerability to impose a squeeze no one would dream of applying to these other sources of income. We repeat that there is no good reason why the

It should be said in justice to the price-control authorities that the provision for individual relief just cited is regarded as an interim arrangement pending the development of something more permanent.

While we have referred thus far to proft squeezing in connection with ceiling price adjustments-a problem largely of the future-there is a current example of official policy in the requirements for the computation of initial price ceilings under the various relations for manufacturing. These ceilings are obtained by adjusting pre-Korea prices for subsequent cost increases up to a prescribed cut-off date, but adjustment is allowed for certain costs orly, increases in the excluded items being "absorbed" by the manufacturer. Not only has the Machinery Institute repeatedly protested this limitation; the recent Capehart amendment to the Defense Production Act appears to reflect its disapproval by Congress.

profits of an industry should be reduced by price control below a fair and reasonable level. That doing so may help to hold the line on prices is not such a reason.

CONCLUSION

We can summarize the foregoing discussion in a few sentences. In practice price control and profit control are interdependent. Let us have done, therefore, with the fiction that profits are not subject to control. For if the authorities acknowledge what they are doing, the profit control that is necessarily involved in their operations can be carried out much more intelligently. Not only should the profits test be limited to the area where it properly belongs, chiefly marketwide or industry-wide adjustments; where it is applied the standard should be profits that are fair and reasonable under the circumstances. Enforced cost absorption or profit squeezing beyond that point should be rigorously excluded. Senator BENTON. We will stand recessed until 10 tomorrow morning.

(Whereupon, at 11:50 a. m., a recess was taken until 10 a. m., Tuesday, September 18, 1951.)