THE FRUITS OF PRICE INVESTIGATION

...Each of the investigations made by the Subcommittee on Anti-trust and Monopoly has been conducted for legislative purposes...

...Penalties for violation of the statutes have been increased, while orders issued by the Federal Trade Commission under the Clayton Act now become final unless appealed—a significant technical change which the FTC had been urging upon Congress for many years...

...The conviction that great power over the economy must reside only in a government of the people will be acted on relentlessly, bluntly, and with force...

...Yet, throughout our history most reforms have been preceded by Congressional investigations which were not directed toward any specific piece of legislation for the simple reason that no meaningful bill can even be drafted until the facts of the matter are known and understood...

...provide that the Food and Drug Administration shall pass on the efficacy as well as the safety of drugs...

...In the words of Walter Adams: "Size, in the sense of market control, is the fact of life, and the essence of the problem, in our concentrated industries...

...Restrictive practices are merely superficial symptoms of the disease...

...Under its generic name the product can be purchased currently from drug stores in Washington, D.C., for less than four cents a pill...

...In mid-1960 the State Welfare Department of New York adopted a new policy requiring doctors treating welfare patients to use generic names for seventeen commonly-used drugs...

...In essence, their position was that competition could be restored only if they were fortunate enough to come across "hard-core" evidence of meetings and agreements— overt conspiracy...

...Bread, the "staff of life," is among the nation's half doze,n most important industries...

...While agreeing on the general nature of the problem, another group of authorities, including Fritz Mach-lup, Corwin Edwards, and Walter Adams, held that not only is competition preferable to controls but that it is not too late to make competition work...

...The results consisted not only of jail sentences and fines for leading company officials but of important savings to buyers as well...

...f Next came an inquiry into the automobile industry, which is not only the nation's largest but one that exercises a pivotal influence upon the rate of activity in the economy generally...

...It may not yet have acquired a full-sized soul, but the contract has been let and the press has been alerted...

...Savings to consumers total more than $50,000,000 a year...

...The bill is directed at each of these sources of market power...

...Indeed, in his celebrated treatise on Congressional government, President Wilson went so far as to say that "The informing function of Congress should be preferred even to its legislative function...

...Its inquiries have been focused . principally on the questions of whether a need for new legislation exists and, if so, what form it should take...

...it has long been referred to as the bellwether of the economy...

...The Fruits of Price Investigation by SENATOR ESTES KEFAUVER On July 9, 1957, the Subcommittee on Anti-trust and Monopoly of the Senate Committee on the Judiciary began hearings on what Gardiner C. Means in 1935 termed "administered prices...

...Without such support the usual fate of legislation in the public interest, particularly if opposed by powerful groups, is permanent interment in the standing committee to which it is referred...

...A principal cause of both the underconsumption in our domestic economy and the loss of foreign markets has been the upward "stair-step" movement of prices in the admin-istered-price industries...

...Now, after four years, twenty-six volumes of hearings numbering 16,505 pages, and four reports, it may be appropriate to inquire what the Subcommittee has accomplished...

...But even if they had not been directed to a legislative purpose, these investigations would still have been appropriate as part of what Woodrow Wilson called the "informing function...

...For reasons which I outlined in an article in The Progressive a year and a half ago and which appear to have been well borne out by the subsequent course of events, there is grave under-utilization of our industrial capacity and our manpower...

...For one thing, there has come out of our hearings a growing recognition that the consumer is the forgotten man not only when capital and labor sit down to divide up the spoils of technological advance, but when governmental agencies act on matters which impinge directly upon his interests...

...To assume all of the credit for this new-found rectitude on the part of the steel companies would be presumptuous since other factors were at work, not the least of which was an approaching national election...

...Nor are they likely to become so unless they receive strong public support...

...Ben Lewis, chairman of the department of economics at Oberlin College, that whether we like it or not the logic of events is working inexorably toward direct controls: "Tutored by its attorneys, bathed, barbered and cosmeticized by Madison Avenue, nourished and sanctified by war and cold war, and enthroned by public opinion which sees only goodness in bigness that is well mannered and well behaved, bigness exhibits the supreme confidence and gracious assurance that bespeak stature, status, and a clear conscience...

...and grant to the FDA authority to determine the generic names for drugs, which now are frequently so long, complex, and unpronounceable that they cannot possibly be remembered or used by physicians...

...Following the strike, conditions were propitious for a price increase...

...Just one month prior to the Subcommittee's hearings on antibiotics in September, 1960, the price of the largest-selling broad-spectrum antibiotic, tetracycline, was reduced fifteen per cent, the first price reduction since the product was introduced in 1954...

...The inquiry has rested basically upon a detailed examination of administered prices in four important industries: fl The first industry examined, steel, produces one of the nation's most basic materials...

...Immediately prior to the Subcommittee's first drug hearings in December, 1959, the price of the largest-selling oral anti-diabetic drug was reduced ten per cent—an annual saving to consumers of $2,500,000...

...There is the rub...

...Industrial concentration...

...The bid on a single TVA generator was reported by the Knoxville News Sentinel in late 1960 to have been reduced by more than five million below a 1959 bid...

...Bigness was once the bad boy in Sunday School...

...Steel raising its price, which is then matched by all of the other steel companies (some of which enjoy even higher profit rates and appear to have lower costs), the anti-trust agencies have insisted that they are powerless to act...

...Press accounts of the cases report that prices for many of the items involved in the conspiracy have been decreased by twenty to thirty per cent since the indictments were returned...

...If these reductions were to apply to only half the volume of sales in these two industrial groups, the annual savings to industry, public utilities, and governmental agencies would amount to some $200 million...

...As a by-product of its legislative work our Subcommittee has carried out this "informing function" which, it appears, has not been without certain beneficial results...

...While the drafting of effective legislation on new and complex problems is itself an accomplishment, it is true that neither the consumer bill nor the drug bill has yet become the law of the land...

...Predictions of demand for steel were optimistic...

...Important as these indirect effects may be, the hard fact remains that the question of what to do about the problem of administered prices remains very much with us...

...The state of New Jersey in December, 1960, decided to purchase drugs for state institutions on the basis of generic names...

...and for its approval of certain drug combinations which are worthless and in some cases dangerous to public health...

...that bigness is not the inevitable result of technology or anything else...

...By stressing the use of generic names in prescribing for welfare patients, the State Welfare Department of Connecticut claimed savings of $250,000 for the first half of 1960...

...In addition to the savings resulting from lower prices and broader use of generic names, the drug investigation has had a number of other effects, not the least of which was the prompt dismissal of Dr...

...That it is a problem is recognized by members of both parties...

...Together with nineteen other Senators, I have introduced a bill...

...A specific example is the failure of the steel companies to raise their prices after the settlement of the steel strike of 1959...

...and the successful efforts of the large drug companies in persuading physicians to prescribe by trade-name rather than by generic name...

...But perhaps an even clearer case in point is provided by the Subcommittee's inquiry into the drug industry, the indirect consequences of which are referred to in the trade press as "fallout effects...

...Some of the metal-using companies were looking forward to a price increase as "a good peg on which to hang higher price tags that would recoup even more than the additional steel costs...

...The Subcommittee made it clear that if the price of steel were increased, it would hold public hearings in which steel officials would be asked to compare the price increase with the cost of the wage increase and to explain the need for the price rise in view of their remarkable profit showings...

...And on others, such as Chloromycetin, it has strengthened the warning language required to appear on labels and in advertisements...

...But if the same result is achieved by price leadership, with, say, U.S...

...If drugs purchased under generic names are of adequate quality for welfare patients, asked Hart, why should they not be equally acceptable for the general public, and if they are not of adequate quality for the general public, why should they be prescribed for welfare patients...

...During the course of the hearings, price reductions were made on still other drug products...

...And, unlike these private pressure groups which are well organized, highly disciplined in the art of exerting influence, and omnipresent when decisions are to be made, consumers are scattered, unorganized, and often unaware that decisions are taken of vital import to their standard of life...

...Throughout our hearings the Food and Drug Administration was the subject of severe criticisms for its failure to require adequate clinical testing of new drugs prior to clearance for marketing...

...A typical case is the arthritic drug, prednisone, which under the tradename Meticorten is sold to the consumer for nearly thirty cents a pill...

...We are losing, and in some cases have already lost, our foreign markets for certain metal and metal-product industries...

...Administered prices are those which, in contrast to competitive prices determined by market supply and demand, are arbitrarily set and held constant, or, on occasion, even increased despite a fall in demand...

...The Subcommittee's total annual appropriation is only $450,000, or less than one per cent of the savings on antibiotics alone...

...As another step which need not wait upon any comprehensive solution to the general administered price problem, I recently introduced a bill, S. 1552, designed to stimulate competition and bring about lower prices in the ethical drug industry...

...see to it that physicians are provided with clearer, better, and additional information on the bad as well as the good features of drugs...

...But this is not to say that nothing can be done and done now...

...A particular source of annoyance to me and to other members of Congress is the citizen who consistently deplores the lack of essential legislation but does nothing to communicate his own views to his elected Senators and Representative...

...In August, 1960, the American Hospital Association's House of Delegates strongly urged hospitals to adopt "formularies" which employ generic names as a means of cutting down expenses...

...In the process they leave behind all kinds of evidence of "hard-core" violations...

...Trade sources suggest that this was a factor in the decision of the^ steel companies not to raise prices, although there is no way of precisely determining its importance...

...Unless this doctrine of "conscious parallelism" is revived, the case for new legislation to deal with the problem of administered pricing becomes very strong indeed...

...During the late 1940's and early 1950's, the anti-trust agencies had made considerable progress in establishing conspiracy through the economic evidence of its operations and effects...

...In this, they were merely manifesting their awareness that an inevitable time lag exists between the advancement of a proposal for legislative action and its final adoption...

...The 1957 increase, alone, was shown to have cost direct steel buyers $500,000;000 a year, and, because of the pyramiding effect, the cost to the ultimate consumer was several times this amount...

...Because of the flagrant abuses of some hearings, such as those of the late Senator Joseph R. McCarthy, this argument has found favor with many individuals of liberal persuasion who formerly would have opposed any restriction on the rights of Congressional committees to get at the facts...

...The importance of even a small volume of mail from the grass roots is confirmed by the lengths to which large organizations will go to evoke a "spontaneous" flow of mail from "the folks back home...

...Bigness is here and, what distinguishes its present from its earlier position, we all know that bigness is here to stay...

...On the one hand is the viewpoint, expressed by Dr...

...It also presents an interesting example of an industry in which there is no technological basis whatever for the concentration of sales in a few large companies, yet nonetheless is changing from a market-determined to an administered-price status...

...It has issued new regulations providing for full disclosure of all information—good and bad—in promotional material...

...But they also recognized that the problem is not going to be solved tomorrow...

...is not inevitable...

...On the basis of material unearthed by the Subcommittee, new actions have been filed in the automobile, bread, and drug industries...

...trust-busting in the literal sense...

...In recent years the argument has been made with increasing frequency that the hearings of Congressional committees should be restricted solely to the consideration of legislation...

...But what kind of legislation...

...It has inaugurated a plan of action with the American Hospital Association, the American Medical Association, and others to secure reports of adverse reactions to drugs...

...Savings have also been effected through the broader use of generic name prescribing, interest in which has been stimulated by our disclosures that non-patented drugs marketed under their generic names are usually available from smaller drug manufacturers at prices far below those charged by the large companies for their trade-name products...

...now it sits on the vestry...

...In addition to these measures which are definitely within the area of the possible, the hearings by the Subcommittee have provided the bases for important additions to the arsenal of anti-trust weapons...

...Rotation bidding, known as "phases of the moon" in one of the more colorful Department of Justice proceedings, is clearly shown in the documentation of the Subcommittee's hearings...

...the money was principally in the form of payments for reprints of articles appearing in medical journals edited by Dr...

...that to this end the government may act in many ways in addition to anti-trust enforcement, such as reducing tariffs...

...Given a market structure dominated by a few firms, it seems inevitable that prices be administered, that there be a deep-seated and characteristic fear of spoiling the market, that price competition be frowned upon as unethical chiseling and cut-throat rivalry deserving of punishment...

...It is man-made, not God-made, and since it is made by man, it can be changed by man...

...for inadequate policing of promotional material of drug companies which fell within the agency's power over "labeling...

...Welch was dismissed upon our revelation that he had received more than $280,000 from antibiotic producers...

...S. 1688, to establish a Department of Consumers of Cabinet rank which would have the right and duty to call to the attention of the regulatory agencies the effects of their actions on consumers before they are taken...

...f Finally, we examined the drug industry...

...require fuller and more comprehensive inspection of drug manufacturing plants and their licensing by the FDA, thereby giving to physicians greater confidence in prescribing on the basis of generic rather than trade names...

...Henry C. Welch, formerly director of the Antibiotics Division of the Food and Drug Administration...

...In each of the previous four years an increase in wage rates had been followed by an increase in price—$4.50 per ton in 1958, $6 in 1957, $8.50 in 1956, and $7.35 in 1955...

...Events will count more heavily than fine logic in determining the action, but events will surely occur, and public action to repossess the power to economize will surely follow...

...With the emergence of big business, big labor, and big government as the central forces in our society, and with the pressures for greater secrecy and non-disclosure coming from everywhere, the need for the "informing function" today is far greater than in the simpler days of Woodrow Wilson...

...We may not solve the problem tomorrow, but we postpone the day of reckoning at our own peril...

...The Justice Department proceedings resulted in the filing of some twenty criminal cases in which twenty-nine corporations and forty-four individuals were charged with conspiracy to fix prices on electrical equipment through identical bids to governmental agencies...

...The importance of drugs lies not so much in the overall size of the business (although with annual sales of $2.5 billion this is hardly negligible), but rather in its crucial relationship to health and indeed life itself...

...It has stiffened its requirements for adequate data in toxicity studies...

...Subsequent to the announcement of those hearings the Department of Justice gave notice that it was beginning a grand jury investigation in Philadelphia of identical bidding in the electrical equipment industry...

...The growing acceptance of generic name-prescribing for welfare patients led Senator Philip Hart of Michigan to raise a logical question...

...Given such a market structure, behavior which inhibits or regulates price competition and which gives the results of collusion and conspiracy must be expected...

...for its failure to act when new evidence revealed significant undesirable side effects of drugs previously cleared...

...The development will reflect a growing, intensified concern over the private possession of economic power so vast that even its possessors are frightened by the implications of their holdings...

...During our hearings outstanding economists who have specialized on this subject described the alternative public policies...

...In introducing the bill, I referred to the preoccupation of the regulatory agencies in settling conflicting claims among rival groups of producers: "Is it surprising, then, that amid this constant tug of war between contesting private interests there is little room for the consumer to be heard...

...In actual dollars and cents the savings to consumers have not been inconsiderable...

...Welch...

...In September, 1959, the Subcommittee held hearings on identical bids on purchases of electrical equipment by the Tennessee Valley Authority and five municipal distributors of electrical power...

...These professions of futility dramatize the basic irony underlying the enforcement of the anti-trust laws...

...But it is in electric machinery that this form of "fallout effect" has been of greatest importance...

...Although now and then an exception, such as electrical goods, turns up to prove the rule, the typical "hard-core" case involves enterprises, such as Louisiana strawberry firms or Maine lobster fishermen, so small and so poor that they are unable to afford the legal fees of corporation law firms, and thus go about the business of fixing prices in the direct, old-fashioned way—through meetings and price-fixing agreements...

...Still another type of indirect result of the Subcommittee's work has been the filing of anti-trust cases...

...enormous advertising and promotional campaigns directed to the doctor which the small drug manufacturer cannot possibly match...

...Still a third group, including Edwin D. Nourse, Gardiner G. Means, and J. Kenneth Galbraith, appeared to express the hope that standards of desirable economic performance and behavior could be evolved and ways and means short of direct governmental intervention in the economic process could be devised to induce the heads of large firms to operate their corporations in accordance with these standards...

...Earlier I referred to the inevitable time lag between the instigation of a reform and its final adoption...

...Bigness spreads its protective arms benevolently over thousands of small, less favored firms, and dispenses justice among them as it is given to see justice...

...and that breaking up the giants would not impair efficiency...

...For one thing, there has been a number of price reductions which the trade has attributed in considerable part to the Subcommittee's investigation...

...At the same time, to ignore completely the Subcommittee's role would be to distort reality...

...Recently the FDA has taken a number of positive steps to meet these criticisms...

...Wage rates had been increased as part of the settlement with the union...

...Among its major provisions the bill would require compulsory licensing—after three years—under patents for drug products...

...These hearings resulted in a printed record of more than 1,200 pages...

...Regardless of the differences in their proposed remedies, these authorities seemed to be in general agreement that the time for action is now...

...In just two categories of products involved in the cases, transformers and switch-gear, manufacturers' shipments in 1958 were valued at $1.6 billion...

...From our hearings it has become obvious that by any standard drug prices are excessive and in some cases outrageous, that this is made possible by a tight control of the market by a few big drug companies, and that this tight control in turn stems from three factors: patent monopolies...

...Daily transcripts of the Subcommittee's hearings, which showed a consistent pattern of identical bidding on electrical equipment, were made available to the Department of Justice in its investigation...

...The new department would act as a central clearinghouse for consumer information and complaints, bringing under one roof the varying agencies of the government whose primary responsibility is to the consumer interest...

...The growing interest in the subject is evident from the fact that the American Medical Association at its meeting in Washington in November, 1960, recommended the use of generic name prescribing for welfare patients as a means of keeping down drug costs...

...It keeps them alive—in the aggregate—and in the main tolerably happy—and in line...

...I suggest that competition, today, is captive to bigness—that today's competition is more controlled than controlling, its temper lessened, its tautness gone slack . . . "My own prediction—and I stress that I am predicting, not prescribing—is that the years ahead will see a great increase in conscious, collective, governmental controls and of governmental enterprise...

...and that bigness will be a major focal point of the development...

...Therefore, if competition is our goal, and I repeat that, if competition is our goal, the only real solution, the most effective remedy, is dissolution, divorcement, and divestiture...

...We then turned to the heads of the anti-trust agencies and asked what action could be taken against the simultaneous price increases, identical bids, and similar manifestations of group behavior we had uncovered...

...It is the concomitant of unimaginative, shortsighted, or corrupt exercise of governmental power...

...Recovery by private and governmental purchasers for past overcharges could run well in excess of a year's savings, since the conspiracy ran from 1951 to 1960...

...But recognition of this social phenomenon should not be interpreted as justifying a passive acceptance of things as they are...

...It has taken a number of drugs with dangerous toxic effects >off the market...

...Courts were increasingly holding that such phenomena as identical bids could not possibly be explained as the result of mere chance but must reflect an "implied conspiracy" or "planned common course of action" and that therefore the law had been violated even though no proof of meetings or formal agreements had been uncovered...

...This position, expressed before our Subcommittee during the previous Administration, represents a tragic retrogression in enforcement...