PUBLIC POLICY AND STEEL

...As the Congressional Office of Technological Assessment says: "The U.S...

...There is not much chance that it will reverse the industry's decline...

...Though small and big business are enthusiastic about improving the "business climate," corporate capital is politely but deeply skeptical of the Reagan program's chances for killing inflation without also eliminating the potential for economic growth that is essential for business opportunities...

...In January 1981 the General Accounting Office (GAO) gave detailed estimates showing that the total program could be expected to yield about $350 million a year—a drop in the bucket considering the industry's needs...

...Thus many governments have ensured that sufficient money is invested in steel so that costs are lowered and prices restrained...

...Though the original impetus for study was concern about the consequences of job losses, the final policy was centered on increasing profits...

...It became clear that the steel industry had come up with a plan that would decrease government tax revenues, increase government administrative costs and the price of steel...

...Both premises are false, and false in somewhat mysterious ways...

...Steel's purchase of Marathon Oil for $6.4 billion may seem to contradict this...

...On the other hand, they cannot allow so bleak a picture to 326 emerge that it will completely discourage what's left of their investors or suggest the need for more radical measures...

...The GAO, in other words, was arguing for a mild form of the kind of state-capitalist planning that is common elsewhere...

...But any modernization plan requires considerably more money than the steel companies have or can borrow...

...Without using these words, what the GAO was essentially recommending was "indicative planning"—a mild form of central planning amounting to little more than government suggestions that an industry achieve certain levels 328 of production consistent with the government's overall economic plan...

...And that, of course, is exactly what most purchasers of corporate stocks and bonds concluded long ago...

...The industry's proposals were designed to provide this assistance by reducing the companies' taxes and regulatory costs and by permitting them to raise their prices—all of which should increase their profits...

...but USS is borrowing some $5.7 billion to pay for this merger and it would not have been able to secure loans of this magnitude for investment in steel...

...But more: the other participants, including the USWA and several independent analysts, shared the illusion that steel can be a profitable business in the contemporary world...

...The steel companies believe that the govern325 ment has treated them unfairly and that all that's needed is some "fair treatment" and they will once again become profitable...

...It has no prospects for growth...

...And there surely is no reason why we must repeat all the errors of the European experience with nationalization...

...Most prominently articulated by Felix Rohatyn and in Business Week's special issue on "Reindustrialization," this program has a much firmer relationship to historical experience and to present reality...

...But beyond that, its program suggests that its own understanding is thoroughly bewitched by a sincere commitment to free-enterprise ideology...

...A major point in the industry's program— accelerated depreciation allowance—was installed last summer, part of the Reagan administration's corporate tax relief program...

...What is more, over the past 20 years the rate for all manufacturing has been increasing while the rate for steel has declined...

...When 200 members of Congress organized themselves into the Congressional Steel Caucus, an extensive study of the industry was undertaken by government agencies...

...And these are the U.S...

...Close analysis of these figures is instructive, because when corporations cry "capital shortage," the left is properly skeptical...

...But it was left to Charles Schultze to articulate the reasons why such an approach should not be undertaken: If [economic] goal-setting [for the industry] is the route to follow, why not establish as goals other criteria which explicitly reflect the interests of consumers, steel users, industry employees, or numerous other constituencies with a legitimate stake in steel industry policy...

...Yet most of the corporate community is hesitant to embrace such a program...

...Public debate over this new role for the state has barely begun, but unless Reagan can turn frogs into princes, it is likely to assume greater prominence in the years ahead...

...On the one hand, the companies must present themselves as sufficiently needy to justify special government assistance...

...second, that with "just a little help" it can become "profitable...

...And though such an expansion of the state is not without dangers, it also provides opportunities for establishing some democratic control over corporate investment and production decisions...

...To prove this, the industry compares its profit rates over the last 24 years with those of "all manufacturing...

...All this the companies now have been granted...

...The industry's case is that it has not been profitable enough to achieve the level of investment necessary to keep up with the modernization of steel in other countries...

...Some form of nationalization of the steel industry is not only compatible with such a policy direction, it is probably inevitable...

...The Reagan administration is proving even more "flexible" with EPA/OSHA requirements than the industry originally requested...

...but the contortions necessary to avoid the simultaneous perception of these facts are a wonder...

...protection from unfair trade practices by other countries' steel industries...

...How one can look at this record and conclude that, without some radical change, the steel industry can ever be profitable by American standards (now about 15 percent in manufacturing) is a mystery...

...To be dependent on foreign steel is like being dependent on foreign oil—uncontrolled price increases reverberate throughout the economy, having simultaneously inflationary and depressive effects...

...The problems of the steel industry could be central in shaping a new political economic discourse, because it is a sector of the economy that fairly screams to be nationalized if only we could see through the ideological mists created by "this nation's economic philosophy...

...The industry, through its association (AISI), dominated the formation of policy because it had the only coherent analysis...

...West Germany does somewhat better—it is nearly half as profitable (2.9 percent) as the American industry...

...Apart from direct government subsidies (which no one has suggested and the industry emphatically does not want), the only way the industry can get the money it needs is to increase profits...

...Unless it installs more modern equipment, it will not be able to produce steel at a cost that allows it to be competitive with steel made abroad...

...Since 1958, the annual rate for all manufacturing has dipped below 10 percent only once (in 1961), while during the same period steel's profit rate has been above 10 percent only once (1974...

...It cannot borrow what it needs because the companies are already heavily in debt (with 50 percent debt/equity ratios in an economy that considers 35 percent acceptable...

...The minor differences between industry and government would not be significant if the industry-shaped policy had a prayer of successfully revitalizing U.S...

...Schultze's challenge...

...The GAO study showed that ad hoc solutions to the steel industry's problems would be woefully inadequate and that government policy was shapeless because it failed to articulate a clear set of "performance objectives" for the industry...

...When we consider the industry's other disadvantages—its high percentage of obsolete plant and its relatively higher costs for labor and raw materials—it seems reasonable to conclude that steel is just no longer a "profitable" enterprise in the United States...

...industry, for example, is in considerably better shape than the British steel industry was when first nationalized...

...Other nations view steel as a key sector in their industrial policies...

...With an aroused citizenry and labor movement, we could get some of the real thing...

...Such a "scenario" may seem unlikely now, but the social and economic wreckage the Reagan administration has initiated may activate community and labor forces that have been relatively dormant for decades...

...Yet no other steel industry in the world (with the exception of Canada) makes anything near the profit rate of the American industry, and none is profitable by the standard of American private investors...

...In the process, government agencies have established a point of view not precisely synonomous with the industry's...

...The actual shortfall over the past four years has been pretty close to what AISI had predicted: $2.2 billion...

...Almost all other nations have therefore concluded that a steel industry can no longer be run on a profit-making basis...

...The steel industry cannot issue new stock because no one would want to buy it...

...It has not been "profitable" by American standards for more than 20 years and can no longer earn or attract the capital it needs to maintain itself...

...steel industry may never achieve international competitiveness unless Federal policies become more comparable to the policies of other countries toward their steel industries...

...industry's major competitors...

...a general reduction in corporate taxes, especially a more generous depreciation allowance for investment in new plant and equipment...

...The industry's fate is not left to the narrow rationality of private investors but is made a matter of public policy and thus (at least, potentially) of political debate...

...What is needed, this view holds, is what other advanced— and many "nonadvanced"—capitalist countries already have: a government industrial policy with component sectoral and regional policies, ensuring that capital is invested for the benefit not only of individual investors but of the economy as a whole...

...Since there is no such hope, our government will inevitably become more deeply entangled with the industry and its problems...

...The fact is that the American steel industry is virtually the only "profitable" steel industry in the world, and yet there is absolutely no reason to think that it can ever become truly "profitable...

...Several new policies were implemented during the Carter administration, but they had no apparent effect on the industry's basic situation...

...To admit that the industry cannot be expected to make an American-sized profit would be to raise questions about whether we really need a steel industry and if so, how one can be provided if the "free market" won't do it...

...The AFL–CIO has already endorsed a policy similar to Rohatyn's...

...Besides preserving jobs, the ability to produce enough steel for one's home market at a reasonable price is the key to a healthy manufacturing sector that can expand and provide more jobs...

...But this sort of approach is coming, and steelworkers and steel communities might be ready to take up Prof...

...This means a quantum leap of government involvement in the economy—it means, if it is to be effective, systematic centralized economic planning and government powers to enforce such plans...

...Over the past four years, then, while the formation of policy has been completely dominated by the industry, the government has taken formal responsibility for the nurturance of this economic sector...

...If the price of steel can be kept at a reasonable level, the cost of capital goods can be lower, productive investment in equipment is encouraged, manufacturing stimulated, and consumer prices are restrained...

...English and French steel consistently lose money...

...Specifically, the companies have wanted: • freedom from government harassment when steel price increases are announced...

...At best, said AISI, the industry could expect to have only about $4.7 billion available for investment, leaving a $2.3 billion annual shortfall...

...Except for the mid-1950s, the steel industry's rate of profit has been substantially below that of all manufacturing—since 1960, around 7 or 8 percent of stockholder's equity as compared with from 12 to 15 percent for all manufacturing...

...Through public ownership and other forms of control, the de327 velopment of these steel industries is planned in relation to an economy-wide industrial policy...

...The Steel Tripartite Committee was formed, which included representatives from the steel companies, the United Steelworkers of America (USWA), and from branches of government...

...The proposals made by this committee were virtually the same as those of the American Iron & Steel Institute (AISI) in its 1980 report, "Steel at the Crossroads...

...But in the case of steel, there is strong evidence that the corporations not only do not have the capital they need to modernize, but that they also lack the ability to raise this capital without massive assistance from the government...

...The industry surely exaggerated its capital needs, but it also appears to have overestimated its potential cash flow...

...But the U.S...

...But while the policy was being "debated," no one figured out how much money the industry's program would actually produce...

...To be fair, the GAO deserves some credit for being able to count...

...These indeed are precisely the questions that should be asked...

...This is not as strange as it sounds...

...Steel in the United States is a "mature" industry, and our political-economic discourse, like other aspects of American culture, is particularly ill-equipped to deal with maturity and aging...

...An exchange between the GAO and President Carter's chief economic adviser, Charles Schultze, reveals the mischief possible—especially in the American context—in shifting from free enterprise to state-capitalist solutions for our economic problems...

...The capital recovery program passed last summer by the Reagan administration included some extra goodies, but its basic thrust is exactly what the industry wanted: it allows corporations to depreciate their plant and equipment as much as five times faster than under the previous tax law...

...but it is the only way a modern nation can have a steel industry that supports its manufacturing sector...

...But no one proposed any other policy, and the steel companies kept insisting that profitability was just around the corner...

...Steel's best years are behind it...

...The entire policy debate over the past four years has centered on how government can help the companies do this...

...Such an eventuality was enough to rule out any experimentation with state-capitalist policies, at least this time around...

...This caused considerable consternation among various government agencies in the Carter administration...

...Although some companies are now dissatisfied with the trade protection they are getting through the complicated "trigger price" mechanism originally installed by the Carter administration, this was very much part of the program they had lobbied for...

...The key premises of all participants have been: first, that if the industry is to survive, it must become "profitable...

...Therefore the industry's managers are not inclined to express self-doubt publicly...

...flexibility" in administering environmental, health, and safety regulations...

...If that happens, the American ruling class may yet regret having shaped a political discourse that equates statecapitalist planning with socialism...

...Government analysts contested these figures...

...steelmaking...

...The basic thrust of the present Administration's economic program is unlikely to survive for long...

...Now it is important to note that in the Rohatyn and Business Week versions of this policy, a government-shaped reindustrialization program would deepen corporate control of American life...

...Opinion leaders within the corporate community have begun to shape an alternative program...

...But by and large the government's and the union's understanding of the problem has been so thoroughly shaped by the industry that their blindness is but an effect of the companies' unshakable self-confidence...

...Nationalization in itself, however, is no panacea for steel, as the European experience clearly shows...

...But despite the clean technocratic line of Rohatyn's and Business Week's scripts, the initiation of centralized government planning runs the risk of further politicizing the economy...

...The U.S...

...And the industry is increasingly caught in a vicious circle—the less money it has to modernize, the less competitive it becomes and, again, the less money it has to modernize...

...Marathon is a "cash cow," expected to yield an annual cash flow of $2.1 billion by 1986...

...Japan, with its superefficient wonder mills and its cooperative labor relations, makes less than one-third the profit of the American industry (an average of 1.7 percent from 1969 to 1977...

...With the exception of Japan, nations have done this through substantial government ownership of steel industries—"nationalization" in one form or another—from around 10 percent government ownership in West Germany and Canada to some 60 to 70 percent in most of Europe...

...While there is some disagreement over causes, everyone who has studied the American steel industry agrees on the nature of the problem: its technology and plant are considerably less modern than those of its competitors in Japan, Europe, and the Third World...

...During the Carter administration, the federal government made a first attempt to address this problem...

...Granting additional powers to government will inevitably mean reducing the powers of specific corporations, even if it were to enhance overall corporate power...

...Some 70,000 steel jobs were permanently eliminated from 1977 to 1980, putting severe strains on local economies in Ohio, Pennsylvania, New York, and elsewhere...

...It cannot be left to die, but it is not clear how it can survive...

...Steel simply cannot achieve profit rates that compare with the rest of the economy...

...In formulating its program, the American Iron & Steel Institute (AISI) carefully counted up the amount of money the industry needs to modernize: $7 billion a year over a 10-year period...

...Therefore steel will add to inflation and generally decrease the health and wealth of the citizenry—all in order to provide for less than one-sixth of the capital it needs to modernize...

...The woeful inadequacy of this policy was understood before its final elements were put into place last summer...

...Yet it remains a basic industry, basic to the economic health of an advanced industrial society...

...It employs hundreds of thousands of people and is at the heart of many regional economies...

...Reaganomics, besides the misery it is causing, may also destroy, once and for all, the American faith in "the free market...

...industry will, of course, have none of this...

...The Carter Justice Department found such an approach incompatible with "this nation's economic philosophy...

...How, one wonders, could the companies and the government (and the USWA) be so blind to the inadequacies of the policy they agreed to...

...For beyond an often genuine commitment to free-enterprise ideology, corporations have justified fears about such a policy...

...In a refashioned political setting, an American nationalization program could avoid turning the industry over to elite bankers and might even fashion a selfmanagement program that would use government money to establish worker-community control of the companies upon which they depend for their livelihood...

...U.S...