The 1960-61 recession has displayed two contradictory characteristics: it has been the mildest postwar recession when measured in terms of the cutbacks in output, capital investments and inventories, but the worst in terms of unemployment and business failures.
The paradox has its origin in the stabilization policies of the Federal Government. These policies have been concerned with the volume, but not the direction, of the flow of funds going to or emanating from the private sector of the economy. In times of recession, budget deficits have, in effect, swelled the cash holdings of businesses and households. The increased total of unemployment compensation and social security payouts (related to earlier-than-intended retirements) has helped maintain aggregate consumer purchasing power. Easier credit has supplemented budgetary deficits. Acceleration of Government contract awards has also acted as a brake on over-all recessionary trends, and has in large part been responsible for eventual upturns.
The fiscal and monetary policies of the Government have thus far in the postwar period undoubtedly helped in dampening cyclical fluctuations. The business cycle being itself an “aggregate” of a vast series of events, the policies dealing with it, too, have been designed to have “aggregate” effects. But the effects are on events, not institutions. The basic institutions and structure of the capitalist economy are strengthened or, at least, protected by stabilization policies. The latter safeguard and promote the private conduct of economic affairs, including the most crucial element of such conduct, namely, the making of investment decisions. At the same time, they have proved to be quite reconcilable with large-scale unemployment, the ruthless elimination of weaker firms, and the misdirection (from a social point of view) of human labor and natural resources. They do not interfere with the kinds of investments made, the location of industry, or the pace of technological development and of the improvement in productivity. On the contrary, they tend to secure, or “underwrite,” the framework within which the decisions affecting these matters are made. They seem socially neutral, but they are complementary with the objectives of business as a class.