POLITICAL CAUSES OF THE RECESSION
Brand, H.
The recession has been deepening now for 7 months. Industrial production, the most sensitive indicator of the state of the economy, has dropped some 10% during this period—a sharper and...
...For we are not in just another postwar recession...
...This too is a result of technological changes...
...rather, foreign aid as it has shaped up has tended to drain economic assets into the wasteland of military uses of skills and materials...
...1. Defense contract lettings have been speeded...
...IT SEEMS INCONCEIVABLE that any modern state will again imperil its very existence by permitting large-scale unemployment...
...So that even though business' dependence upon public outlays is obvious, it rightly fears, and seeks to resist, the political consequences of this dependence...
...1) the burden of combating the cheapening of the dollar is shifted to wage and salary earners, who stand to lose their jobs as business slows...
...Indications of a coming downturn had been multiplying since late 1956, when employment in some key industries began to slacken...
...Unemployment, consequently, has been increasing, and has already risen to higher levels than those prevailing in July 1949 or March 1954, the crests reached during the two earlier recessions...
...short-term bond holdings to current liabilities—during last year's third quarter dropped to the lowest figures since the Securities & Exchange Commission began to report it in the thirties...
...and similar moves in this field in early 1949 and in mid-1953 indeed were a prelude to residential housing booms...
...There are two, more fundamental, causes for this preoccupation...
...there is a need for perhaps 18,000 new schools...
...suffice it to say that neither the factor of the cost of new homes—which have risen from around $12,000 per average house 4 years ago, to over $15,000 at present —nor population factors, nor consumer confidence, bode well for a new housing boom...
...But defense spending, viewed strictly from its effects on employment, today involves two troublous questions: a) The number of jobs involved, whatever its present magnitude, is not necessarily raised by mere increased spending...
...2) corporate property interests, who should be made to carry this burden since it originates from rising prices from which they benefit the most, suffer no losses of real values through such measures...
...We are entering a new era, the shape of which is still uncertain...
...and awards for industrial building—both reliable indicators of the future pace of investments— were dropping off markedly...
...This ratio, if anything, overstates general liquidity conditions...
...IT IS EVIDENT that the Administration has defaulted on its legal obligation 100 to maintain full employment...
...In some cases —as in construction, agriculture and shipping—it has become a kind of fief, an administrative arm of the government in all but legal form...
...American cities are literally rotting at their core...
...As organized at present, agricultural subsidies operate in large part 101 as a regressive tax on the mass of consumers, whose real incomes are lowered by high food prices...
...In the face of lengthening lines in the unemployment insurance offices, Eisenhower mouthes phrases about the need for confidence, but remains silent about the need for jobs...
...True, certain halting steps to counteract the downturn have been taken...
...Moreover, the potentials of foreign assistance for the world economy, and hence for that of the U.S., have not even begun to be tapped...
...nor can it be in an economy dominated by private interests...
...This is understandable only on political grounds: such programs involve not merely capital but operating expenditures as well...
...e., the ratio of cash and near-cash U.S...
...As it is, the V.A.-guaranteed loan system, which made slightly less than half of private housing starts possible in 1954 and 1955, has been allowed to die, thanks to the pressure of the big mortgage investment bankers...
...it is a sprawling, not altogether predictable, enterprise in an environment which refuses to be Prussianized, and which is unreasonable enough at times to insist on its democratic traditions and procedures, despite the tentacular hierarchies in its midst...
...3. A word about the much-touted "built-in stabilizers...
...Military "hardware," with the wide dispersion of its production over many plants and in many areas, and its ability to devour vast amounts of labor and materials, plays a diminishing role...
...Let me briefly discuss their effectiveness...
...To develop these areas, therefore, the role of the Federal government, which alone has the power to create the necessary credits, is essential...
...Secondly, the very real fear of inflation on the part of the big financial interests has led them to oppose strenuously all deficit financing...
...Large sums go into the design and fabrication of highly specialized weapons, to relatively few contractors...
...They should, to be sure, facilitate mortgage marketings...
...b) The multiplier effect—the waves of spending proceeding from the initial recipients of government outlays to their suppliers, from these to secondary suppliers, and so on—is of doubtful intensity here...
...Technological developments in defense are so rapid that capacity additions— which would permit increased employment—become too risky...
...and even at their worst they cannot be discounted as a potentially major political force...
...Hence its futile and inept attempts to reduce it...
...Employment generally was growing at a very much slower rate, from the beginning of 1957, than in previous years...
...The real income of manufacturing workers—a measure of employee incomes generally—declined by 4% during the year ending last December, and has continued downward...
...Initiating them on a scale and in a manner sufficient to stabilize full employment demands fundamental political decisions...
...is fairly homogeneous, government is not...
...Industrial production, the most sensitive indicator of the state of the economy, has dropped some 10% during this period—a sharper and swifter decline than took place in the 1949 and 1954 recessions...
...Moreover, their prices remain unaffected anyway...
...This power is inherent in the vast and growing size of the budget in relation to gross national product...
...It takes, at least, a reorganization of the building industry and a system of government, or virtual government, loans to prospective buyers...
...Engineering News-Record, a McGraw-Hill publication, estimates the backlog of public works at over $60 billion...
...But it is not just a reflection of the businessman's mania for financial solvency no matter what the economic and social consequences...
...True, the business cycle has not been eliminated...
...The housing outlook cannot be analyzed here at length...
...There were good economic reasons why private business could not, without outside stimulus, keep up its rate of investment—but only political reasons why the Administration failed to intervene in time to prevent this recession...
...It cut defense outlays —a major pillar of business activity nowadays—substantially, and in disregard of the effects of such a cut on employment...
...This trend is due to contracting economic forces in only a narrow sense...
...The corporate liquidity ratioi...
...Their sharp contraction now more than offsets the intensity of their earlier expansion, which itself was stimulated by the growth in demand associated with full employment, and whose rate was altogether unsustainable...
...There exist enormous renewal and expansion needs in public capital assets...
...This accounts for the stringent monetary policies of the Federal Reserve, which led to the astoundingly low, and for many smaller businesses, ruinous level of monetary liquidity during most of 1957...
...But just as the expansion of investment in the post-World War II period was to a large extent stimulated by large government outlays and, under the Democrats especially, by a fiscal and monetary policy favoring it, so could the present contraction have been avoided, had the Eisenhower Administration been willing to do so...
...They cannot increase investment, which alone spurs employment...
...a multitude of welfare and natural resource conservation projects await development...
...There is a related, and more general, reason, however: a salient feature of Eisenhower's economic policy has been to balance the budget...
...Business crackpots launch "Believe in America" weeks, kidding themselves into the belief that psychology will turn the trick...
...It will be no vacation from great anxieties...
...March, 1958 102...
...It remains subject to strong non-business pressures...
...The interruptions it suffered were minor, and were bridged by the impact of heavy foreign aid expenditures and pent-up consumer demand in the late forties, and the tight capacity conditions and postponed equipment replacement needs of the midfifties...
...Their work force is of relatively small size and, moreover, being in the middle and higher income brackets, may be presumed to save a larger portion of their income than ordinary wage and salary earners...
...This implies a trend towards amalgamation of business and government, with this inescapable qualification, however: that while Big Business in the U.S...
...These steps, however, have failed to halt the steepest decline in new loan demands from business since World War II...
...and residential housing was in a veritable slump, despite a vacancy rate approaching the lows of the immediate postwar years...
...Yet, again, this is the danger the Administration and Congress are courting if they fail to mobilize employment-creating forces...
...There has been a nearly fanatical preoccupation with this...
...Beginning with January 1957, new orders for manufacturers' durables (i.e., machinery, etc...
...What it did in ending the depression of the thirties, and even in sustaining the Korean war boom into 1953, should not be expected from it now...
...From mid-1956 on, consumer durables were piling up in warehouses...
...Rather, the end of a major cyclical upswing has been reached (was actually reached a year ago already, when the rate of expansion, though not expansion itself, slowed...
...99 FOREMOST AMONG THESE REASONS was and is the weakening of the foundations of full employment, and with them the trade unions...
...The threat of devaluation of vast debt holdings, to be sure, affects many working and small property-owning people who have to a growing extent become dependent upon old-age pensions...
...b) Price floors under agricultural commodities benefit a relatively small segment of income earners today...
...Thus, they become "built-in" welfare enterprises, with substantial claims not only on economic resources—and their impact on taxation—but on social loyalties as well...
...The average workweek has fallen to pre-World War II levels, indicating wide-spread underemployment...
...and it cannot be dismissed...
...business has been dependent on large-scale government spending in the past 25 years for making its growth possible...
...c) Full employment, and the steady incomes it brings, is also an unstabilizing factor in an unplanned economy, similar to lessened income inequality (if it exists...
...The monetary authorities, for their part, enforced a severely restrictive credit policy, the major effect of which was to prevent expansion in just those areas—like housing and the associated durable goods, as well as in municipal and state construction— where expansion was most possible and necessary...
...Nevertheless, the Administration remained passive...
...Rather, contract awards are added to the affected industries' backlog of unfilled orders...
...Firstly, it represents an attempt somehow to halt the shift to government authority of the power to make key economic decisions...
...Whatever their shortcomings, the unions are the pace setters of labor's gains...
...But neither the Administration nor (as yet) Congress have shown any disposition to embark on these programs, except in the cramped spirit of shopkeepers...
...2. A number of credit-easing steps have been taken by the Administration...
...The postwar period of prosperity and political sterility is behind us...
...The expansion of the consumer durable industries ceases (or slows down, theoretically, to the rate of net new household formations), once the needs they cater to are satiated...
...There can be no question that U.S...
...However, by invoking anti-inflationary measures which affect the economy in general, the administration has brought about two results...
...The state and local authorities do not have the revenue base which would permit them to go into the money market for the required funds...
...a) Unemployment insurance and social security payments can do no more than cushion the impact of a recession, and put a floor—and a low floor it is—under consumption...
...It promises a growing degree of internal political polarization, as economic questions once again move to the forefront of politics...
Vol. 5 • April 1958 • No. 2
