New England's manufacturing employment has declined 9 percen in the last 10 years and that of the Midwest, your own region, declined 14 percent between 1960 and 1975. New Jersey has lost 115,000 factory jobs since 1969 and heavily industrialized regions like Michigan and Ohio lost nearly 200,000 each in plant shutdowns in relatively the same period.

The shutdown phenomenon is most visible in the industrial areas of the North and Midwest, but plant shutdowns affect smaller towns and rural areas just as much as cities, and contrary to popular opinion the so-called Sunbelt States are not the major beneficiaries of the new jobs by attracting runaway plants with generally lower wages and nonunionized work forces. Our research shows, for example, that between 1971 and 1976, only about 9 percent of plant relocations were to the Sunbelt. Where do the jobs go? Cornell University economists Robert Frank and Richard Freeman have found between 1966 and 1973 there was a net American loss overseas of 1.06 million jobs. The South is also losing jobs overseas, and net gains in total employment in the South are masking the effects of many plant shutdowns taking place there. Plant shutdowns are truly a national problem and job preservation should be a common concern to all regions.

Plant closings take place with painful abruptness. Generally, the law does not require a firm to give notice to its employees or the community and very often there is insufficient time to consider alternatives or plan for the consequences. The Federal and State government response is limited. The Government can spend money on unemployment compensation, welfare or expensive job training programs, but these are only short-term solutions.

When a plant closes, a ripple effect goes through the business community, the tax base disappears, and an area's economy can be devastated for years. The U.S. Chamber of Commerce, for example, esti mates that 68 nonmanufacturing jobs are created in a locality for every 100 manufacturing jobs. If a plant closes, others are affected.

Many shutdowns are inevitable. Companies which are not efficient and cannot turn a profit simply have to close. But research shows that many shutdowns are not financially or economically necessary.

First, conglomerates are a dominant force in American industry, and becoming increasingly so. In 1950, the 200 largest corporations in America held 47.7 percent of the Nation's manufacturing assets. By 1972, that figure had risen to 60 percent. These percentages reflect the conglomerate merger movement which peaked in 1967-69 with over 3.500 mergers annually. The trend is continuing, although at a slower pace however.

The trend toward conglomerate ownership is troubling in the respect that conglomerates have a narrow, "bottom line" attitude toward their subsidiaries. Accumulation of properties is frequently followed by the divestiture of plants that are considered expendable by conglomerate management. Conglomerate management is often located away from the scene. Top managers are interested only in profits. It is the use of capital which concerns them and determines whether to move or relocate.

Local people, both workers and managers, are more likely to be sensitive to the needs of the local community as opposed to conglom

erate owners who may abandon plants simply because they see more profitable opportunities elsewhere. It is more likely for conglomerate owners to react hurriedly to temporary losses, and pull out before making much effort to turn the business around. Employees and local community owners have too much to lose from such choices, and because of their personal stake in their firms, have every reason to try and make them viable enterprises.

While it might make pure economic sense for a conglomerate to shut down a plant making 8 percent profit, for example, it also makes pure economic sense to save that plant, save those jobs, because the local community and workers stand to lose much more than the profit margin.

Skipping over now to about the middle of page 4, if it may.

Some may ask, "Why should a company shut down a plant that makes money?" According to William Foote Whyte, of Cornell, the answer is simple. He finds conglomerate decisionmakers will shut down a profitable operation simply because they believe they can make more money in other parts of their empire. Professor Whyte cites the case of a plant which produced library furniture in Herkimer, N.Y., and made a profit in 19 out of the 20 years it had been owned by SperryRand. However, it fell short of the 22 percent on invested capital which top management had set as its standard of success and was dropped by Sperry-Rand.

Bennett Harrison, associate professor of economics and urban studies at MIT reports on one giant conglomerate that required all of its new subsidiaries to produce a 25-percent pretax rate of return on investment annually. This requirement was to create capital for the parent conglomerate's further expansion plans. Most of the newly acquired subsidiaries had only a 7- or 8-percent rate of profit. As a result, this conglomerate destroyed about 4,000 New England jobs with closings generated by its policy. Are these lost jobs offset by jobs created in other areas by conglomerates? The answer I think is no.

Last year the House Subcommittee on Small Business, Antitrust, Consumers and Employment completed a study in which it found that during the 8-year period from 1969 through 1976, the 1,000 largest corporations in the Nation contributed less than 1 percent of the approximate 9.5 million jobs added during that time. This is a startling fact and it is even more upsetting when we focus on certain regions. Data provided by David Birch of MIT reveals that between 1969 and 1976 independent and local companies in the Northeast created on balance, about 406,000 new jobs and multibranch corporations created 36,000 new jobs. Conglomerates? Conglomerates actually destroyed over 31.000 new jobs during that time.

Looking at the record, I contend that alternatives to conglomerate ownership need to be encouraged. It is for this reason that my colleagues in the House, Stanley Lundine and Matthew McHugh and I drafted legislation to authorize EDA to grant loans for employee and employee-community groups to purchase plants that would otherwise close. If the EDA determines that a plant can feasibly stay in business, the loans would be used to arrange the purchase, to cover start-up and initial operating costs, and to allow employees to acquire stock in the new firm. The act authorizes the expenditure of $100 million in the

first year with appropriations rising gradually to $177 million for the seventh year.

Near the end of the period, the Secretary of Commerce is directed to make a study and to report to Congress on the cost of the program in comparison with other measures designed to deal with the problem. This idea represents a tremendous potential savings for the Government. The costs when a plant shuts down accumulate with welfare. food stamps, unemployment checks, the increased need for social and health services and family disintegration. Medical research indicates a wide variety of serious diseases can be traced to stress caused from plant shutdown. There is a loss of employment in industries dependent on the plant's employees, trade adjustment assistance payments must be made, and there is a loss of the local and State tax base and. finally, Federal taxes.

It is just one example of an alternative legislative solution which recognizes that the big-government approach is no longer feasible or realistic for handling every complex economic and social problem. The threat of long-term inflation, deficit budgets and burdensome taxation requires that we enable and encourage the most efficient and sensible nongovernmental solutions. We must begin to phase in as much as is possible citizen cooperative, and local solutions involving minimal Government resources.

In utilizing this approach, our bill authorizes two kinds of loans— to the newly constituted firm and to individual employees for the purpose of enabling them to buy stock in their own enterprise. The company itself would be responsible to the Federal Government for collecting principal and interest payments on the loans granted employees. In order to qualify for such loans, employees are required to agree to payroll deductions under terms and conditions to be established by the Department of Commerce. To summarize, Mr. Chairman, our research shows that conglomerate ownership costs jobs and is not responsive to local and regional needs.

Your subcommittee is exploring conglomerate ownership, and the possible abuse of the failing company doctrine as a means of conglomerate expansion. I think there are better ways to save jobs than to rely on large conglomerates to take over failing companies. Experience shows that in the long run reliance on conglomerates is counterproductive and that other programs and Federal initiatives should be explored.

Thank you very much.

Senator METZENBAUM. Thank you Congressman Kostmayer for an excellent statement. I do have a couple of questions.

During your extensive study of the impact of business decisions on employees and communities, did you find that the owners of independent businesses are likely to accept a rate of return on their investment which is not acceptable to managers of conglomerates?

Mr. KOSTMAYER. I think that is very often the case. If a small company is operating in a medium-sized city or a small town, the annual rate of return is maybe only 8 or 9 percent, that may be below what a conglomerate would want. They might want a much higher rate of return, 14 or 15 percent, or higher. If that small company doesn't fit into their overall picture, they will shut it down and make money

somewhere else. But, of course, the 8 or 9 percent is perfectly acceptable to the people in that community. They would like to make more, of course, but by maintaining the plant there, by keeping jobs there, stabilizing the local tax base, even only at an annual rate of 8 or 9 percent or lower, as long as a profit is being made. I think there is a greater incentive for them to keep that plant open.

Senator METZENBAUM. A theory that has been talked about or rather a practice that has been talked about rather extensively in the business community was described in a New York Times story on April 15, 1979. This business strategy is championed by a leading management consulting group-the Boston Consulting Group.

The strategy that is discussed is the "milking procedure." It is described as a "cow" with a high share of a slow growth market. A conglomerate should milk the subsidiary; that is, money should be removed and reinvested in a "star."

Did you find that a number of conglomerates actually milked their subsidiaries and then sold the assets?

Mr. KOSTMAYER. Yes; we did find a number of instances where conglomerates will buy a smaller firm and really buy it essentially for its book value and close it after they as you say, "milked" it as much as they could. They simply sell it out and redeem the book value or the cash value, and of course, the jobs are then lost.

Senator METZENBAUM. Then in selling it, if they can sell it because it hasn't been making any money and it comes under the failing company doctrine, they can in effect sell the market share which does have a value and if there are any patents or trademarks or capital equipment, that also would be included in the sale so that shareholders might very well come out much better off, but the employees and the community would be suffering.

Mr. KOSTMAYER. Absolutely, and, of course, under our bill, the employees and the shareholders are one and the same.

Senator METZENBAUM. Have the conglomerates that you have examined indicated much concern for the employees and the communities which are affected by the plant closings?

Mr. KOSTMAYER. Well, I think they have probably become more responsible than they once were, but I think that their primary obligation is to produce a high rate of return for their shareholders. Their obligation is not to their employees. I think that under the employee ownership plan where the shareholders and the employees are the same people, then obviously the obligation is to themselves and is much more beneficial in the long run.

Senator METZENBAUM. Do you feel that your legislation, the Voluntary Job Preservation and Community Stabilization Act, would have an adverse budgetary impact?

Mr. KOSTMAYER. I think it could save money. Indeed, I think it would save money in the long run by saving jobs. People lose jobs. They lose so much; they have to collect unemployment or welfare or retraining programs.

The alternative I suggest is to provide them with a simple system of loans to buy their plant. We are not talking about bailing out businesses which would lose anyway. We accept the fact that some businesses are just not making money. They are going to go under.

This is a simple way to loan them some money which they would pay back at a very low rate of interest and we would recoup this money. The initial authorization will be coming up this week in the House Banking Committee for $100 million. This money will be recouped. No. 1, and No. 2, a great deal of money which would be expended if they were to lose their jobs would not be expended.

Senator METZENBAUM. Would these be grants or loans under your bill?

Mr. KOSTMAYER. These would be loans and they would be paid back through a simple payroll deduction basis.

Senator METZENBAUM. Do you think that the $100 million can have much of an impact? When Youngstown Sheet and Tube closed down we are talking about $550 million for that one plant. Do you think the $100 million is adequate?

Mr. KOSTMAYER. Well, I don't think it is adequate, but we have to be realistic and ask for something we think we have a chance of getting.

Obviously, in the case of Youngstown Sheet and Tube in your own State, Senator, we would be way short of what is needed. We are talking mainly about smaller manufacturing plants and small towns throughout the Midwest, my part of the country, and New England. or anywhere really.

Senator METZENBAUM. As you probably know, Senator Kennedy and I have several bills with respect to protecting small business by not permitting mergers at a certain economic level. Do you feel that those would help in your efforts to protect the small businesses?

Mr. KOSTMAYER. I think very strongly they would. They would prevent the sort of thing we are trying to prevent, absolutely.

Senator METZENBAUM. Senator Thurmond.

Senator THURMOND. Thank you very much, Mr. Chairman. Mr. Chairman, I have several committee meetings this morning. I will have to run from one to the other, so if I am not here the full time. I am sure you will understand.

Senator METZENBAUM. I certainly will. I appreciate your being here.

OPENING STATEMENT OF SENATOR THURMOND

Senator THURMOND. First I want to say since we are beginning hearings today on a new and more specific subject area within the overall conglomerate merger area, I wish to reserve the right to submit my statement concerning this new area until later. I feel the need to study more carefully the subject matter concerning this particular issue, including the testimony that will be presented at today's hearings. As we proceed to consider any new or specific issues such as this, certainly we need to be extremely careful that we give appropriate studies to the economic consequences and to the equity and fairness for all concerned.

Mr. Chairman, I feel sure that you and the other members of this subcommittee share my feeling that it is our duty to develop and implement legislation that serves the best public interest of the Nation. This, of course, will require our careful consideration and deliberation as we view new legislation approaches such as that before us here today.