The chairman of the nation's largest steel company predicts that inflation will remain near double-digit rates until the end of the year or beyond and that the Carter administration will have done well if it can reduce inflation to the 7 percent range by the end of 1980.
Edgar B. Speer, chairman of U.S. Steel Corp., said in an interview that there is no way inflation can be reduced substantially in the near term and that the government should fix its sights on attacking the longer-range problems associated with inflation: low productivity and tax policies that hinder investment.
Speer's prognosis on inflation is far more pessimistic than that of the administration. Although officials such as inflation counselor Robert S. Strauss say that Carter's midyear projection of a 7.2 percent inflation rate this year is too low, most see a tapering off in the rate of price increases between now and the end of the year, a prognosis reinforced by last Friday's report of a decline in August wholesale prices.
In a wide-ranging interview in his 61st-floor office in the company's Pittsburgh headquarters, the 62-year-old Speer said he thought the bigger business tax cuts provided in the House-passed tax bill last month were a "step in the right direction." But he said more must be done to encourage industry to invest in new, modern equipment to arrest the decline in U.S. productivity that is boosting costs and putting pressure on prices.
Speer also defended the large wage increases that steel workers have received in recent years - wage increases which Council on Wage and Price Stability Director Barry Bosworth has said must be reduced if the fight against inflation is to be won. Speer said that steel workers have not received wage boosts out of line with their contribution to productivity.
But, he said, heavy required investment in antipollution equipment and the costs of running that equipment have eaten up any productivity gains from "line workers."
Following are excerpts from an hour-and-forty-five minute interview with Speer.
Question: We're more than a year and a half into the Carter administration. How well has it handled the economy? What about business confidence?
Answer: Well, I guess there are two very serious things that they haven't really been able to get their arms around. One is this problem with inflation - and the value of the dollar which, of course, is part of the inflation problem. I don't think the economy is very robust either. I think it's moving along and in fairly good shape but there hasn't been really anything done as far as the government is concerned to direct more of the gross national product into modernization and expansion of the productivity of the economy. Until that's done, we're going to have inflation problems; we're going to have unemployment problems . . .
I don't know that the so-called business confidence - whatever that means - has changed a great deal. But the Carter administration at this point in time appears to be willing to take a look at the effect some of the regulatory bodies are having on business . . .
Q: What about economic growth?
A: I think the economy is definitely showing a downtrend . . . . But it's quite apparent that the administration by policy is not going to permit the economy to slow down to negative growth. And I don't think we have to take a recession . . . .
Q: Is the downtrend showing up in your order?
A: We don't see it in the consumption rate. But we see it in orders. Which is quite natural. I mean, when imports move from 1.3 million tons (in June) to 1.8 million tons (in July), it has a very sudden effect . . . . But we still think the industry will ship between 95 and 96 million tons of steel this year (last year it was 91.1 million tons).
Q: What about next year?
A: Well, next year - at least as we see it - is still very uncertain. We look for the first half of the year to be reasonably good and the second half probably not as good as the first. From all indications, next year will be pretty much the same kind of year as this year.
Q: What is the outlook for inflation?
A: Well, the inflation is built in right now. Most of the major contracts have been negotiated. We know what the increase in wages will be for the next two years.
Inflation right now is something over 9 percent, 9.5 percent. I don't believe in the short term that's going to be reduced. And well - like interest rates - it could well slip into the double digits before year end. A base has been established for inflation because of what's transpired in the last 18 months. We probably have a built-in base of 7 percent or 7.5 percent. If Mr. Carter's administration can get inflation below 7 percent during its first term in office, I think he'll be doing an excellent job.
Q: That sounds very pessimistic. What can the administration do about it.
A: I do think we have to have fiscal policies that will control inflation. I don't think they have (given us sound fiscal policies) in the first years that the administration was in office . . . I think, however, there are indications that they are facing up to those factors that result in higher inflation. You know, we talk about cutting taxes. If you aren't talking in the same breath that you're going to reduce your spending in the same amount that you're going to reduce your taxes, you really aren't reducing taxes, you're deferring a liability.
Q: What about the administration's voluntary anti-inflation program, now being revised into a Phase II?
A: I think the government has to assume a leadership role in this whole fight on inflation. How it conducts itself to a very great extent has a significant impact on inflation results. And that goes for labor agreements, particularly in the industries that are organized . . . The government sets the minimum wage rate (which) has a significant bearing on wages - all wages whether they're organized our unorganized . . . The bottom of the scale is sort of the base, and everything is built on top of that. If the minimum wage is raised 10 percent, you could expect that average wages will go up a minimum of 7 percent.
Q: Do you agree with Federal Reserve Board Chairman G. William Miller that scheduled increases in the minimum wage should be postponed for a year?
A: Absolutely. Or beyond. I don't think that we ought to do anything in this country that promises higher costs until we get the inflation well under control.
Q: Is a voluntary anti-inflation program, with whatever refinements Carter may put on it, going to be effective?
A: I think a voluntary program can be effective. It has to be a voluntary program that labor, government and the private sector work at, though. It can't be worked just on the fact that you're going to restrain increases to executive management to no more than 5 percent and you don't increase the price of your products by any more than they were increased the prior year.
Q: Then what else would you do?
A: There's a lot of things that have to go together. For instance, I think we have to have tax reforms. I think we have to zero in on productivity if we're going to get this inflation thing under control.
Q: What about the government's attitude toward business?
A: There seems to be no willingness to protect business. Government over-taxes us, and we run a country with wide-open borders permitting any foreign country to ship any and all products into this market with absolutely no restrictions . . . The technology of electronics was developed in this country. We forced the manufacturing of major electronics products into foreign countries. And, of course, you know the story on all the rest of them: shoes, textiles, steel . . . . We don't seem to have the willingness to establish the rules and regulations that permit our industries in this country to compete world-wide let alone compete in our own market. We permit the predatory pricing of products coming into the market (from aboard), and we tax the hell out of domestic producers, which makes them less and less competitive.
Q: The administration talks of the need to increase business investment.
A: Well, let's face it. You have "X" numbers of dollars, and if there isn't set aside a certain part of that pie for investment in tools and machinery, then there isn't replacement. There isn't modernization.There isn't the opportunity to take advantage of new technology. Consequently, productivity becomes stagnant, and it is stagnant in this country, and it's a result of lack of investment being made in the private sector, and the reason there's lack of investment is that the dollars are being siphoned off for other purposes.
There's only one way you're going to get (high investment) . . . through such things as higher investment credit and, more importantly, getting around to facing up to the archaic tax laws we live under in this country. No industry - steel or otherwise - can live in today's world with 20-year depreciation lines, which determines how much cash flow you can generate through your business, which is what it takes to reinvest in new facilities, new tools and also forth.
Q: What about the House tax cut? It provides tax relief for business?
A: It is a step in the right direction. I don't think it goes far enough.
Q: Barry Bosworth, who heads the Council on Wage and Price Stability, has said inflation will never be licked until some unions, such as in steel, tone down the wage increases they have been getting, which have out-stripped increases the average workers have received. What do you think?
A: You can't take that by itself. Really what effects the bottom line (costs and prices) is not what you pay per hour but how many units of production you get out of "X" number of man-hours of "X" number of dollars for labor. So you're back into productivity.
And you know, we went through a period of about 10 years, for practically the decade of the 1960s, where the steel industry was spending its capital dollars on new technology. Our productivity was improving at a rate of about 2 to 2.5 percent per year on the average.
Then we get into the 1970s, and the amount of capital dollars that went to put new technology in place was reduced substantially. A major portion of those dollars went into nonproductive facilities that took man-hours to operate. I'm speaking now of your pollution-control apparatus. By spending a disproportionate amount of the capital for nonproductive facilities, the increase in productivity that we were getting from the line workers was more than offset.
Now I've suggested - not very effectively, I have to say - that maybe an answer to this problem is to establish two standards: that we equip the existing facilities with pollution-control apparatus that will control the emissions of 90 or 95 percent of what you'd ultimately like to do and, as you replace those facilities, you engineer and build into those (new) facilities the best available technology . . . Now I have to quickly admit it would take 15 years to reach the ultimate objective rather than 8 years.