Was the cause of the 1960 recession psychological? and now?
What caused the recession of 1960?
Here is an answer given at timerime.com.
“The recession of 1960-1961 was mainly due to the high inflation, high unemployment rates, and a bad gross national product rating. This recession lasted for 10 months and resulted in the second longest economic expansion in U.S. history. During Kennedy’s 1960 presidential campaign he sought to accelerate economic growth by increasing government spending and cutting taxes, and increased funds for education. The GDP of the United States during this period fell 1.6%, and the unemployment rate hit its peak at 7.1%. Kennedy knew that the economy was in big trouble so he sent congress an economic growth and recovery package consisting of twelve measures. They were an increase in the minimum wage from .00 to .25 per hour, an extension of the minimum wage to a greater pool of workers, an increase in unemployment compensation with an increased aid to children of unemployed workers, an increase in social security benefits to a larger pool of people, emergency relief for feed grain farmers, area redevelopment, vocational training for displaced workers, and federal funding for home building and slum eradication. JFK ended the recession by stimulating the economy ten days after taking office.”
Did inflation cause the recession of 1960?
There does not appear to be much inflation around 1960.
How about the stimulus package from Kennedy? Did it end the recession? How much did government expenditures change?
Link to graph #2. (source BEA NIPA tables)
It does not appear as though the economic growth and recovery package by Kennedy was a big change from previous government spending.
So what caused the 1960 recession?
Investopedia said…
“This recession was also known as the “rolling adjustment” for many major U.S. industries, including the automotive industry. Americans shifted to buying compact and often foreign-made cars and industry drew down inventories. Gross national product (GNP) and product demand declined.”
So did imports increase around 1960 as a % of GDP?
OK… Imports were rising some from 1955 to 1960 and then stabilized after the 1960 recession. Does the stabilization of imports contradict the economic fact that international trade makes everyone better off?
How about inventories?
Inventories were still increasing before the recession.
How about monetary policy? Did the Fed tighten before the 1960 recession?
OK… now we see something. The Fed tightened before the 1958 and 1960 recessions. Why did the Fed tighten before 1960? Well, Christina Romer and David Romer tell us in their 2002 paper, “A Rehabilitation of Monetary Policy in the 1950’s“.
“Finally, it is not easy to predict the consequences of a decline in the labor share, and the corresponding increase in the capital share, of a sector of the economy as opposed to the labor share of the overall economy. Nevertheless, a decline in the share from almost 60% to less than 30% is significant and may have important consequences. An increase in the share of profits probably leads to an increase in investment early on. Simultaneously, a decrease in the share of labor over an extended period of time induces a decline in consumption or prevents consumption from increasing, even if the economy is growing. Sooner or later there is a mismatch between supply and demand as the increase in capacity caused by the increase in investment will not be matched by an increase in consumption demand. This is a problem of lack of demand, an under-consumption crisis. Capacity utilization will have to decline and along with it will come a decline in production, employment, investment, and demand.”
Economists do not think this describes the United States… yet. But it is this dynamic of low labor share that will bring about a limit on “production, employment, investment, and demand” before economists expect. And the Federal Reserve says not one word about labor share. They are going to be blind-sided on this one. Psychologically, economists don’t have a comprehensive contextual perception of the effect of low labor share, as Federal Reserve members did not have a comprehensive contextual perception of inflation back in the 1950’s.
Here is the updated graph of the effective demand limit with the new numbers for real GDP (2009 dollars). We are close…
Ed, another big part of the equation is that around 1959 there was a deficit of 2.5% of GDP, and at the beginning of the recession the budget was balanced. You see the same pattern for the recession that occurred in 1958 too. See FRED chart:
http://research.stlouisfed.org/fredgraph.png?g=m1P
The problem with those who think it’s just a matter of low inflation and capasity still to be used is they have no history in mind of what you are discribing. There have not been recessions/depression that are from the conditions you discribe since we stopped having kings reducing peoples ability to spend do to the kings ever increasing need to finance their war adventures. Resulted in the same thing as today, decresed share of income. And we even have the war adventures.
Also, the smart ones are refusing (other than Krugman I guess) are refusing to acknowledge the general contraction going on in the country. Of course it is happening in the aspects of the economy that is the life of labor and not capital, capital being thier only focus and only focus.
On top of the decline of share of income to labor is the rate of income growth to the top 1% such that their income is doubling faster than the GDP. Through games they have been able to keep this going. Part of the game involved “emerging markets” but, without the capital development of mature markets, I would suspect even capital growth has to go into contraction to match the growth rate of “emerging markets” and that growth rate may not be so fast when considering actual currency values.
Lambert
William Greider in Secrets of the Temple argues that the 1980 recession was caused by the Fed fighting inflation too long.
Do you have any thoughts about that. What did the labor share of income look like then?
I do remember a lot of worrying about the 1% (or whatever) inflation rate of the 1950s. World War II really pushed up prices, so I’m willing to believe the Fed kept the brakes on. In the 1960s, with inflation getting much higher, people used to look back and laugh, but the inflation fear had been real.
I also remember the 1980 recession and the insane interest rates that were part of the war on inflation. I had a 12.25% mortgage, but a friend of mine got stuck with one at 20%. Needless to say, auto loans and credit card debt also went through the roof and I know a lot of people who had to retrench.
Also, your Graph #6 has the “Leading up to the next recession (by quarters)”, but the horizontal axis is label in TFUR % units. That can’t be right.
Kaleberg,
1% was a worry in the 1950’s? I didn’t realize that.
the x-axis is capacity utilization given in % mulitplied by employment rate given in % too. so the result is percent.
Like,
78% capacity util. x 92% employment = 72% TFUR
lambert
so what about 1980?
Coberly,
The economy hit the effective demand limit in the 3rd quarter of 1978. The recession began in July of 1980 though. but realize that capacity utilization started falling the same time the effective demand was hit, 3rd quarter 1978. It fell all the way to July of 1980. Unemployment started rising 2nd quarter 1979. Real GDP rose very slowly from 4thQ1978 thru 2ndQ1979.
The consumption rate of capital income dropped low in the 3rd quarter of 1978 too. The business cycle had already topped out by the end of 1978. The Fed rate reached 10% at that point, but still rose to over 13% by the start of the recession. What kept the economy growing even though capital and labor utilization were dropping?
Real GDP went above the effective demand limit in 1978. We were on the other side of the LRAS curve. This turned into an inflation spiral with slow real growth. Inflation was rising fast, and it was fueling the economy to produce a little more, but LRAS inflation is like sugar, you get energy, but no real nutrition. There was little real GDP growth with that inflation. If you go back and look at real GDP growth through 1979, it was slow.
So how do you stop this type of cost-push inflation from wages rising and prices rising? The Fed stepped in and had to raise the Fed rate again. They had let it float at 10% after the 3rd Q of 1978. But it wasn’t enough to hold back the LRAS curve inflation. They had to raise it again. Eventually the Fed rate cut the inflation spiral from the LRAS curve. and the dynamics of that had to wind back down… thus the recession started.