Political Causes of the Recession

Political Causes of the Recession

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 swifter decline than took place in the 1949 and 1954 recessions. 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. The average workweek has fallen to pre-World War II levels, indicating wide-spread underemployment. 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.

This trend is due to contracting economic forces in only a narrow sense. True, the business cycle has not been eliminated; nor can it be in an economy dominated by private interests. 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.

Indications of a coming downturn had been multiplying since late 1956, when employment in some key industries began to slacken. Employment generally was growing at a very much slower rate, from the beginning of 1957, than in previous years. From mid-1956 on, consumer durables were piling up in warehouses; and residential housing was in a veritable slump, despite a vacancy rate approaching the lows of the immediate postwar years. Beginning with January 1957, new orders for manufacturers’ durables (i.e., machinery, etc.) and awards for industrial building—both reliable indicators of the future pace of investments—were dropping off markedly.

Nevertheless, the Administration remained passive. It cut defense outlays —a major pillar of business activity nowadays—substantially, and in disregard of the effects of such a cut on employment. 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. 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.