Now, Representative Kostmayer, I just want to say we are glad to have you with us and appreciate your appearance.

I would like to propound this question to you. In 1970, the Congress passed the so-called failing newspaper law. Now this gave such failing newspapers an exemption from the antitrust laws so that in a given city where there is a morning newspaper and an afternoon newspaper and one of them is closed as a failing newspaper, the two newspapers can then enter into an agreement to share profits, share advertising and newspaper subscriptions at appropriate percentages without violating the antirust laws.

Now in your opinion how does the failing newspaper company doctrine and the newspaper exemption differ from the failing company doctrine discussed today in this hearing?

Mr. KOSTMAYER. Well, I think as Senator Metzenbaum said, Senator Thurmond, before you came in, there are instances in which the failing company doctrine is very valid. There ought to be some exemptions to the Clayton Antitrust law. But I think what we have to do is to examine closely when those exemptions should be allowed and when they should not be allowed. I think there are instances when exemptions have been allowed that in the long run that advantage has been taken of the failing business doctrine and the conglomerate has just really taken advantage of it to sell out the smaller company to redeem its cash value.

But I do think there are instances where it is valuable. I think really the important work that your subcommittee is involved in is to determine where it is valid and where it is not valid.

I do think there are instances where it is valid.

Senator THURMOND. Do you feel that legislation should be introduced on this subject? And do you feel it would be helpful?

Mr. KOSTMAYER. Yes, I do. On the failing business doctrine or on the-yes, I think so.

Senator THURMOND. Do you think you could distinguish that from the failing newspaper?

Mr. KOSTMAYER. Well, I am not sure.

Senator THURMOND. Do you think they run parallel?

Mr. KOSTMAYER. Well, I am not sure I can make a distinction between or understand the differences between failing companies and failing newspapers. No. I am not sure I recognize the distinctions

there.

Senator THURMOND. For instance, if you have a failing company in a small community, is there any objection to the citizens looking to the best solution of that question, even if it requires a merger?

Mr. KOSTMAYER. No, I think not, but I think you have to realize there is a possibility that small company may be merging with a large company and the large company may not really be interested in preserving jobs there. Their interest may just be to acquire the cash value and sell out a couple of years later and then the people who work for that small company, small textile mill, for example, in your State, are out of luck.

What our bill does is to allow those people who work in that factory or that mill, say 150 of them, to borrow money from the Federal Government and buy that place and take it over. The townspeople,

the managers, and the employees pay that money back to the Federal Government a little bit at a time through a simple payroll deduction system and then they control the jobs there. It is in their interest, even if the rate of return is lower than it might ordinarily be, to keep that place operating and working there in their small town.

Senator THURMOND. They would borrow the money from the Federal Government?

Mr. KOSTMAYER. That is right.

Senator THURMOND. What agency? Should this be a separate agency set up?

Mr. KOSTMAYER. No. I don't think it is necessary.

Senator THURMOND. What agency already set up could handle that do you think?

Mr. KOSTMAYER. Well I think the Economic Development Administration in Commerce could do it.

Senator THURMOND. EDA?

Mr. KOSTMAYER. Yes. I don't think we need to set up any new agency or any new employees. Of course, this money will be paid back. And not only will the money be paid back, Senator, but these people won't be going on unemployment compensation or welfare. They won't have to be retrained.

The first thing that needs to happen is for EDA to determine whether or not the business can survive. If it is a business that is going to fail, we are not interested in going in and bailing out losers.

The first thing that has to be determined is, maybe this company. a small company in your State, maybe it is being sold for valid reasons. Senator THURMOND. What you really favor then is to continue that private enterprise, let the Government more or less be the banker to finance it?

Mr. KOSTMAYER. That is right, Senator.

Senator THURMOND. In other words, the Government wouldn't take it over. The Government would not operate it. It would not be a responsibility of the Government. It wouldn't be socialism. It would just be financing by the Government of a private enterprise in order to keep that enterprise operating whereas otherwise it was going and the people would be without jobs.

Mr. KOSTMAYER. That is right.

Senator THURMOND. In brief, is that what you believe it is?

Mr. KOSTMAYER. That is right. The money would be paid back and would save a lot of money for the taxpayers and keep people working. Senator THURMOND. We would be prepared to take a look at that and it has a lot of ramifications where you would have to consider other things.

Thank you very much.

Mr. KOSTMAYER. Thank you, Senator.

Senator METZENBAUM. Thank you very much, Congressman Kostmayer. I would just add a word concerning the failing newspaper doctrine that my good friend on the left here mentioned.

Senator THURMOND. I am sitting on his left.

Senator METZENBAUM. It is purely a matter of perspective; from over there you are on my right. So it is all right. [Laughter.]

The failing newspaper doctrine is a subject that at some point this committee will probably address. I, myself, have some mixed emotions

about it.

One argument is that it keeps one newspaper from closing up in a community when you have only two newspapers, a morning and an afternoon, and otherwise one might be forced out of business, normally the afternoon one.

On the other hand, it would appear that too often the competitive aspects of two newspapers in a community, the competitive editorial involvement of two newspapers in a community, is lost. Sometimes the same people cover for both the morning and afternoon newspapers.

It is not a simple question. It has now happened in my own State, in Cincinnati. Everything seems to happen in my State. Not all of it is particularly good. But the Attorney General or the FTC gave approval of a recent operating arrangement of that kind. I am just not certain whether the public purposes were served or not. I did not want the record to go without at least indicating some concern that I have whether that is good or bad.

Mr. KOSTMAYER. Well, I share your concern about the decline of the independent newspaper and the voices of independent newspapers in this country. It hadn't occurred to me before, but I don't see why our bill couldn't apply to a newspaper which shut down. Of course, it wouldn't apply to a very expensive, big city newspaper for the same reason it wouldn't apply to Youngstown Sheet and Tube, there probably is not enough money.

But in my congressional district we just lost a small weekly paper to a chain, a chain of weeklies. There probably would be enough money for a small town weekly paper or even in some cases, a daily.

So, there is no reason why this bill could not be applied to newspapers.

Senator METZENBAUM. Thank you very much, Congressman Kost

mayer.

Mr. KOSTMAYER. Mr. Chairman, thank you. Senator Thurmond, thank you.

[The prepared statement of Congressman Kostmayer follows:]

PREPARED STATEMENT OF CONGRESSMAN PETER H. KOSTMAYER

Mr. Chairman, I appreciate the opportunity to testify before your subcommittee.

The growth of conglomerates, I believe, has created problems in our economy, problems which deserve congressional scrutiny and attention.

I would like to address my comments to plant shutdowns, the relationship of shutdowns and unemployment to conglomerate ownership, and briefly mention how, in some instances, employee ownership of business has been used as a useful alternative to prevent such shutdowns.

Plant shutdowns in the past decade have occurred with alarming frequency, hurting thousands of Americans and threatening the economic stability of their communities. When a firm closes, employees often lose more than their jobs. The economic hardship and uncertainty can wreck families, affect mental health, and cause extended personal suffering. Idleness may last for months and many workers require substantial retraining before they are again employable. The costs to society are staggering.

We see examples of this phenomenon time and time again. In my own State of Pennsylvania, Philadelphia has lost at least 40,000 manufacturing jobs in the last 10 years, and Pittsburgh and other cities in Pennsylvania have suffered

similar losses. New England's manufacturing employment has declined 9 percent in the last 10 years and that of the Midwest 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 phenomena 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 workforces. 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, however, and do not combat the basic problem-preserving jobs. 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 United States Chamber of Commerce, for example, estimates 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. I would like to explore relationships between conglomerates and plant shutdowns.

First, conglomerates are a dominant force in American industry, and getting 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.

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 conglomerate 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 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.

The relationship between conglomerates and plant shutdowns and the issue of absentee ownership has been studied by economist David L. Barkley, assistant professor of economics, University of Redlands. He looked at the concentration of ownership in an area and demonstrated that branch plants are significantly less locationally stable than indigenous manufacturers. His study was conducted

in the State of Iowa and his findings are convincing. He postulates that multiplant corporations should be able to survive a cyclical or secular downturn in sales given that they are able to realize certain economics that only large independent firms can realize, and that branch plants have a better ability than local firms to select capable managers and maintain easy access to financial markets. "However the locational stability of branch plants still may be inferior to that of local manufacturers if their propensity for outmigration greatly exceeds that of indigenous firms. This inclination for branch plant migration during periods of depressed demand results from: (1) The ability of multiplant firms to increase production efficiency by consolidating production into fewer plants; (2) the ability of multiplant concerns to reduce overhead costs by closing branches and transferring production elsewhere; (3) the fact that indigenous firms are more likely to experience locational inertia than plants whose owners reside outside the community."

Controlling for product type, employment categories, and regional disparities (the western part of Iowa has a high transit cost), and, even with a lower bankruptcy rate than the indigenous firms, rural Iowa branch plants had 50 percent higher instability than independent manufacturers. Local ownership shows a greater ability, or desire, to withstand an unstable climate.

Mr. Chairman, I would be happy to provide the subcommittee with a copy of the Barkley study.

[The study of David L. Barkley can be found in the appendix.]

Some may ask, "Why would a company shut down a plant that makes money?" According to William Foote Whyte, of Cornell University, the answer is simple. He finds conglomerate decision makers will shut down a profitable operation simply because they believe they can make more money in other parts of their economic 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 20 years it had been owned by Sperry-Rand. 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 its new subsidiaries to produce a 25 percent pre-tax rate of return on investment each year. This requirement was to create capital for the parent conglomerate's further expansion plans. Most of the newly acquired subsidiaries had only a 7 to 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 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 to the economy.

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 (i.e. openings and expansions minus contractions and closings) about 406,000 new jobs and multibranch corporations created 36,000 new jobs. Conglomerates? Conglomerates destroyed over 31,000 new jobs during that time period in the nine Northeastern states!

Looking at this record. Mr. Chairman, I contend that alternatives to conglomerate ownership need to be encouraged by the Federal Government.

It is for this reason that my colleagues in the House, Stanley Lundine and Matthew McHugh, and I drafted legislation (H.R. 2203) to authorize the Economic Development Administration to grant loans for employee and employeecommunity 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 the 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 for the seventh year. Near the end of ths period, the Secretary of Commerce is directed to make a study and to report to Congress on the cost effectiveness of this program in comparison with other measures designed to deal with the problems of unemployment.