Vance Archive   |   Trotskyist Writers Index  |   ETOL Main Page

T.N. Vance

Notes of the Quarter

The Eisenhower Recession

The Causes and Depth of the Economic Decline

(March 1958)

T.N. Vance, The Eisenhower Recession, New International, Winter 1958, pp.3-9.
Transcribed by Ted Crawford.
Marked up by Einde O’Callaghan for the Encyclopaedia of Trotskyism On-Line (ETOL).

What kind of recession? It is now clear that the Eisenhower recession is no mild, inventory adjustment. In six months, from August 1957 to February 1958, the Federal Reserve Index of industrial production has declined from 145 to 130 – a decrease of more than 10 per cent. Unemployment in February is officially placed at 5,173,000 – an increase of about two million in six months, placing official unemployment at the highest post-World War II level, exceeding by an appreciable amount the 4,700,000 reached in 1949-1950, prior to the break of the Korean war. Steel production is at 52.4 per cent of capacity against 93.5 per cent a year ago. Weekly steel production is currently at 1,415,000 tons – almost a million tons a week less than a year ago. Motor vehicle production is running at 101,266 units a week, compared with 161,865 vehicles in the comparable week 1957. Oil production and freight car loadings are off substantially. In fact, all durables show a 10 per cent decline from February, 1957 to February 1958, with consumer durables down 20 per cent. Business failures are way up, and the pressures for the Federal government to “do something” are increasing daily from virtually every class and every segment of society.

It appears likely that March figures will show further declines. Aside from Fortune magazine and certain other Republican spokesmen for the big bourgeoisie, most analysts and commentators are ready to concede that this is the most serious post-war recession (in fact, before public relations became the chief science of government, this would have been called a depression) and that there will be no immediate upturn. Writes a New York Times financial columnist in the issue of March 23rd: “As the week ended, it was clear that the recession was still in progress, though slowing perhaps. While some of the key economic indicators are still sharply depressed from year-ago levels, their recent rates of decline have slackened. This has led to the belief in some quarters that a ‘bottoming-out’ of the downtrend might be imminent. But little hope is held for any marked up-turn before the fourth quarter of this year or early 1959.” (Italics mine – T.N.V.)

To be sure, this is not 1929-1933, but it is also not 1948-1949 nor 1953-1954. One should not forget that the recession of 1948-1949 was undoubtedly cut short by the timely (from an economic point of view) arrival of the Korean war. And the recession of 1953-1954 was probably held to minimum duration by the passage of the “tax swindle” Revenue Act of 1954 providing, among other things, for accelerated depreciation. It is also an open secret that major forces within the Eisenhower administration preferred to ignore the signs that the economy was softening and attempted, through strict credit controls and high interest rates, to induce a “little” depression.

The big bourgeoisie, whose captive Eisenhower is, has simply been pursuing the class struggle in its own interests. As we said in our article in the Summer, 1957 issue of The New International (p.178): “The big bourgeoisie demand a halt to inflation, or rather they use the concern of the working classes to prevent inflation as a device for getting the government to raise interest rates and to place a squeeze on small and medium-size business.” It goes without saying that among the calculations of big capital is the expectation that a working class with 5,000,000 or so unemployed will be more docile and its unions more “amenable to common sense” when negotiations for new contracts take place.

Like a breath of clean fresh air, the Eisenhower recession has suddenly swept away all the nonsense about capitalism having achieved “permanent prosperity.” It is clear that the Eisenhower recession is a major cyclical downturn in the epoch of the Permanent War Economy. Its severity is not to be compared with the Great Depression of the 1930’s, but only because capitalism has entered a new stage, which we have named the Permanent War Economy. As we forecast at the conclusion of our previously-quoted article in the Summer, 1957 issue of The New International: “The impossibility of continuing to expand in all three departments of production will lead to a deteriorating economic situation and in the relatively near future to the beginnings of a first-rate political crisis.” The deteriorating economic situation is at hand and the political crisis is about to unfold.
 

II

What has happened to the war outlays ratio? In the epoch of the Permanent War Economy stage of capitalism, a prime mover becomes the ratio of war outlays to total production, as we have explained on numerous occasions in these pages. In our article in the Summer, 1957 issue, we presented up-to-date calculations, from which we extract merely the ratio of war outlays to total production from its peak in 1952 through 1956:

We estimate that this crucial ratio remained the same in 1957 as in 1956, namely, 12.7 per cent. How, then, could there have been such a sharp decline taking place during the latter part of 1957? A year, of course, is a rather long period of time and such a unit of measure tends to blunt the cyclical fluctuations. These can be seen by examining quarterly movements within the economy, as is also the case for the over-all picture of economy.

Gross national product, for example for the year 1957 (see the February 1958 issue of the Survey of Current Business) is estimated at $434.4 billion almost a five per cent increase in prices over the $414.7 billion figure of 1956. To be sure, practically all the increase represents the inflation in prices, but the fact is that for the year as a whole 1957 set a production peak. 1958, of course, will be another story. Yet, if one examines the quarterly movements, the steady upward trend reached its peak in the third quarter, with GNP at a seasonally adjusted annual rate of $440 billion, declining in the fourth quarter to a level of $432.6 billion. We can thus pinpoint, so far as gross national product is concerned, the third quarter of 1957 as the start of the Eisenhower recession. And August appears to be the month in which most meaningful indexes turned downwards.

If we examine the ratio of war out-lays to total production in 1957 by quarters, we obtain the following picture (using estimates of the Department of Commerce, in accordance with methods set forth in the Summer, 1957 and March-April, 1953 issues of The New International):

Thus, a decline of about four per cent took place in the war outlays ratio between the second and third quarters of 1957. The decline was based on the planned reduction in war outlays by the Eisenhower administration, under the influence of the budget-cutting drive spearheaded by big business organizations and representatives. This, of course, occurred at a time when total output was still increasing and helped to bring about the end of the boom and the beginning of the recession. A war outlays ratio of 12.5 per cent brings us back almost to the pre-Korean level and materially weakens one of the major sustaining props under the economy.

As was to be expected, the Kremlin came to the rescue of sorely beleaguered American capitalism with the Sputnik and the manner in which it was launched. Immediately, the budget-cutting drive ceased and an increase in “defense” expenditures was sanctioned by all classes in American society. The difficulty is that the Federal bureaucracy is a ponderous machine and it takes time for it to move. It will still be several months, before the planned increase in war outlays will be realized in the form of increased production and employment.

Meanwhile, the clamor for immediate action steadily increases. A tremendous debate has arisen between the advocates of increased public expenditures (in which camp are most of the leading Democrats) and the supporters of an immediate tax cut (in which camp are a number of Republican leaders). Many Republicans, of course, still favor doing nothing; and the Administration has stated that it will wait another month before deciding whether special government intervention measures are required.

In this connection, it is interesting to note the position of Professor Arthur F. Burns, formerly Eisenhower’s chief economic advisor. He stated in a speech delivered in Chicago on March 22, and reported in The New York Times of March 23, 1958: “If, on the other hand, we delay more than a very few weeks, in the hope that economic recovery will come on its own by midyear, we shall be taking the risk of having to resort later to drastic medicine.” Burns, it should be noted, is on record as favoring an immediate and permanent “broadly based” $5 billion tax cut.

While a tax cut does not possess the “multiplier” effects of an increase in the war outlays ratio, it can have some hypodermic effect, depending on the nature and size of the tax cut. Neither approach, by itself, carries any promise of arresting the decline in capital accumulation – and it is this, more than any other factor, that bothers the more knowledgeable defenders of the bourgeoisie when they glibly predict that the recession will be of short duration.
 

III

Why the decline in capital accumulation? The figures on capital formation or accumulation always leave much to be desired. Nevertheless, the present trends are unmistakably clear and disputed by no one. Capital accumulation turned downward in 1957 and will continue downward throughout 1958.

If we take the figures on gross private domestic investment in constant (1947) dollars of the Department of Commerce, we get the following totals:

Here, the effects of the accelerated depreciation provisions of the Revenue Act of 1954 are apparent in 1955 and 1956. Yet, a decline of almost seven per cent set in 1957, and all forecasts for 1958 reveal the expectation of further and sharper declines.

If we confine ourselves to plant and equipment expenditures, the most decisive portion of capital accumulation, we find a dramatic rise from $26 billion in 1954 to over $37 billion in 1957. Yet, here, too, the quarterly analysis of 1957 figures shows a decline from a third quarter seasonally adjusted annual total of $37.75 billion to a fourth quarter level of $37.47 with a sharp decline expected to be shown once the first quarter of figures become available.

The economic crisis is revealed, above all, in the sudden decision of capitalists to forego planned investments in plant expansion or decision of big corporations to reduce sharply expenditures for new plant and equipment. It is as if all of a sudden the capitalist class, or at least large segments of it, has reached the conclusion that present capacity is more than ample to take care of existing demand. In this respect, the Eisenhower recession is typical of a classical capitalist depression, albeit it takes place in a different epoch and with the economy operating at very high levels.

The fact is, however, that this is a durable goods crisis. In virtually every such industry, idle capacity under capitalist conditions of production exists. In some cases, such as the railroads, the industry is permanently sick and an intelligent bourgeois would take the lead in favoring nationalization. The American bourgeoisie, however, especially its Republican wing, is so immersed in the fetishism of private capital that it will drive some of its leading elements to suicide rather than permit its state to socialize the losses of an important basic industry.

Having accelerated depreciation allowances over the last three years thereby borrowing from future capital accumulation, the bourgeoisie is in a quandary. Another “gimmick” of this nature is not in the cards, although watch for certain advocates of a tax cut to stress the “necessity to provide a stimulus for investment, for those who make jobs.” And with capital accumulation in a state of obvious decline, the only real remedy that the bourgeoisie has is to increase government expenditures, which again brings them face to face with the fetishism of private capital that dominates especially the more Republican sections of the bourgeoisie. Hence, the indecision of the Eisenhower administration, and its plaintive hope that by postponing a decision as to a tax cut or sizable increase in government expenditures, or both, the economy will suddenly right itself, thereby avoiding the necessity of a decision.
 

IV

What about the built-in stabilizers? The answer is that despite much room for further improvement, above all the need to increase the amount of unemployment insurance and its duration, as well as other aspects of government – supported purchasing power, the built-in stabilizers have worked. An interesting and essentially correct article on this subject appears in the Review of the Week section The New York Times of March 23, 1958 by economics reporter Edwin L. Dale, Jr. Comparing the postwar slumps with that of 1929, aside from the fact that the decline in production was greater and more severe in 1929, Dale properly points out that the main difference has been that personal income, due to the built-in stabilizers, has declined much less. He puts it this way:

In 1929-30, personal income fell off about 8 per cent in the first seven months of the slump. This meant a sharp and severe drop in purchasing power.

Since that time there have been added unemployment compensation, other social security payments affecting mainly the aged and farm price supports. These “income cushions,” otherwise known as built-in stabilizers, have worked beautifully in the postwar slumps.

Compared with the 8 per cent decline in personal income in 1929-30, the decline in 1948-49’s first seven months was 3.1 per cent, while in 1953-54 it was 1.9 per cent and 1.3 per cent in 1957-58. This means that purchasing power in each postwar slump has fallen far less than production and considerably less than employment.

Of course, without the development of the Permanent War Economy, these built-in stabilizers would be helpless to stem the tide of recession. By themselves, unemployment insurance and other purchasing power supplements would be relatively powerless and, as in the case of Germany under the Weimar Republic, would simply be swept away by a desperate and impoverished middle class driven to the support of fascism.

That Dale is not so sure of the outlook can be seen from the conclusion of his article:

This postwar experience is an illustration of why the present situation is such a difficult one. True, the gods have once again provided a lucky break – the post-Sputnik increase in defense spending.

But there is real doubt that this will be enough. Hence the widespread belief that this recession is providing much the most severe test of whether modern American governments can and will take the right actions to cure successfully a serious slump. (Italics mine – T.N.V.)
 

V

Whose anti-recession program and for whom? The significant fact is that the Eisenhower administration, despite its being the creation of the fetishists of private capital, has already taken governmental action to try to stem the tide of recession. The government has lowered the rate of interest, through its control of the money markets, and attempted to ease credit. It is clear that these actions by themselves will not suffice. Certain foreign economic measures, as well as certain military expenditures, are presented as necessary to stimulate economic recovery, a tactic that riles the more orthodox Republicans. Gestures are being made in the direction of trying to persuade the states to extend the period of unemployment insurance benefits. All this is a far cry from the last Republican administration under Hoover. Naturally, the Democrats do not suffer nearly to the same degree from the fetishism of private capital, and hence (especially as an opposition political party) they are developing all kinds of proposals for large-scale public expenditures.

Since the most optimistic economic forecast merely hopes for a leveling off at the bottom during the second quarter and perhaps a slight upturn by the end of 1958, and since 1958 is an election year, it is quite apparent that there will be some type of tax cut in 1958, possibly a temporary one along the lines of the Committee for Economic Development proposal. Naturally, any flat percentage tax cut will be of greater benefit to the upper income groups than to the lower.

As always, when major economic policy questions become matters of practical politics, the class struggle has an ugly habit of intruding itself, to the despair of the “classless patriots.” A tax cut can have art immediate effect, but the question of “for whom?” is most relevant. Instead of the trade-union movement making pious representations to Eisenhower, it is time that labor developed a hard-hitting political-economic program, divorced from both the Democrats and Republicans. Among the planks that such a program ought to include are the following:

1. Developing the responsibility of society for the existence of unemployment and the support of the unemployed by raising benefits to a minimum of one-half of the previous wage and increasing the duration of unemployment insurance benefits from the present maximum of 26 weeks to 35 weeks. A program of this type should be financed by a capital levy (five per cent would be more than adequate on all aggregates of private capital in excess of one million dollars.
2. Nationalizing those industries whose output is essential to the public welfare and which can no longer be operated profitably under private capital. The starting point should be the railroads, with an immediate perspective of including all interstate transportation.
3. A large-scale public Works program, starting at $5 billion for the first year, to help build such institutions as schools, hospitals, roads etc.
4. Take the profit out of war industry by limiting profits to a maximum return of six per cent on invested capital. Nationalize those industries whose output is 100 per cent for military purposes.
5. Reducing Federal personal income taxes by increasing the dependency credit from $600 per dependent to $900, thereby eliminating the lower income groups from the burden of Federal income taxation, and making the existing burden more equitable than at present.

There are other measures that unionists and socialists could advocate. The important point, however is that the pressure of the unemployed and the rank and file on the trade union leadership is bound to increase. As these economic pressures develop and the longer the Eisenhower recession lasts, the more powerful will the pressures become, the sooner will become apparent to broad sections of the American working class that only through class political action can even the most elementary of economic demands be satisfied. The forthcoming political crisis will usher in a period of regroupment of political forces among all classes. Now is the time for labor to lay the foundations of independent political action!

Top of page

Vance Archive   |   Trotskyist Writers Index  |   ETOL Main Page

Last updated: 25.5.2005