We\u27ve had three economic recessions during the past 11 years, but our built-in stabilizers and buffers have worked rather well. Though we can\u27t be certain, it looks as though another catastrophic depression such as that of the 1930\u27s is unlikely to re-occur in the years ahead

Fox, Karl A

English

We've had three economic recessions during the past 11 years, but our built-in stabilizers and buffers have worked rather well. Though we can't be certain, it looks as though another catastrophic depression such as that of the 1930's is unlikely to re-occur in the years ahead.</p

Fox, Karl

Digital Repository @ Iowa State University (ISU)

Do We Have Depressions Licked? We've had three economic recessions during the past 11 years, but our built-in stabilizers and buffers have worked rather well. Though we can't be certain, it looks as though another catastrophic de pression such as that of the 1930's is unlikely to re-occur in the years ahead. by Karl A. Fox FARM FAMILIES have a two-fold interest in the nonfarm economy. It is the major source of demand for farm products and also the source of employment for many of our farm youth and others seeking nonfarm employ-ment. Thus, farm people have a very direct interest in the well-being and stability of the nonfarm economy. For rather than depres-sions and recessions being "farm led and farm fed,'' the evidence points to the reverse. The Great Depression of the 1930's bore with it severe conse-quences for farm and urban fam-ilies alike. Thus, economic insta-bility in the nonfarm economy affects and is of concern to farm families. How does it affect agri-culture? First, we need to correct some widely held notions about the ex-tent of the variations in nonfarm KARL A. FOX is professor and head of economics and sociology at Iowa State. employment and business activity. Much of our continuing preoccu-pation with economic stability stems from that one catastrophic experience--the depression of the 1930's. From 1929 to 1932-33, the real gross national product (the value of all goods and serv-ices produced) of our economy slumped 30 percent. Industrial production skidded SO percent, and total employment dropped 20 percent. At the depth of this de-pression, a fourth of our entire labor force was idle. 'l;'hen, in every year from 1931 through 1940, unemployment av-eraged at least 14 percent of the labor force. The defense prepara-tions of 1940-41 ended this "dec-ade of idleness." And they were followed by the super-activity of World War II. From 1942 through 19 S 7, there was not as much as 6-percent unemployment in any one year. The average dur-ing 1948-57 was about 4 percent - not much more than the mini-mum rate necessary to permit the normal movement of workers from one job to another. Not Likely Again . . . Economists and many business leaders and legislators learned enough as a result of the great de-pression that nothing of a similar nature or magnitude is likely to recur. It was an expensive lesson. But out of it came such things as recommendations for counter-cy-clical fiscal policies; the adoption of social security legislation which acts to some extent as a built-in stabilizer against recession; and the passage of the Employment Act of 1946 which, among other things, created a Council of Eco-nomic Advisers in the executive Office of the President and a Joint Economic Committee of Congress. Because of definite structural changes in our economy and in-creased knowledge and specific national stabilization policies, the experience of the 1930's seems largely irrelevant to the current situation. In the past 11 years, 3-287 we've seen three recessions and two complete recoveries. We're now in the midst of a third re-covery. Since 1948 . . . The three economic recessions since 1948 have been concentrated in the durable goods manufactur-ing industries. And our impres-sions of the severity of these re-cessions are typically colored by the behavior of a few industries, such as automobiles and steel. In these recessions during 1948-58, the average drop in employ-ment from peak to trough in durable goods manufacturing in-dustries was 13.2 percent. In min-ing, the average decline was 9 percent. Nondurable manufactur-ing industries showed an average dip of 5.5 percent, while the aver-age was 5.9 percent in transporta-tion and public utilities. But the decline in wholesale and retail trade averaged only 1.6 percent. And employment in such categories as finance, insurance, and state, local and federal gov-ernment actually increased from 0.1 to 1.9 percent. The average decline in total nonjarm employment in the three recessions was only 4 percent. And, if we allow for the relatively stable employment of farm oper-ators, other farm workers, profes-sional workers and nonfarm busi-ness operators, the average decline in total civilian employment dur-ing the three recessions was only about 3.1 percent. Thus, the se-verity of the employment drops in each of the recent recessions was less than a fifth as great as in the 1929-32 depression. 'ilhy Less Severe? A recession in nonfarm employ-ment cuts the incomes of the workers then unemployed. Before 1933, the purchasing power of un-employed workers would fall al-most to zero. When they shifted from meat and eggs to flour and beans under such emergencies, the demand for livestock products would shrink, and prices received by farmers would drop sharply. The effects of built-in stabiliz-ers, such a unemployment com-4-288 pensation and a progressive in-come tax structure, have changed this picture to a considerable ex-tent. About a tenth of the total de-mand for United States farm products comes from foreign coun-tries. The rest of the commercial demand comes from domestic sources. And at least 90 percent of this domestic demand gets into the farm economy through the stream of consumer spending for nondurable goods- food, tobacco, cotton and woolen clothing, house-hold textiles, leather shoes and certain other products. Less than 10 percent of the domestic de-mand for farm products comes through such channels as business investment and government pur-chase (for other than price-sup-port purposes) . The table shows how disposable personal income and consumer spending are protected from the effects of declines in the gross na-tional product by various "buf-fers" and "built-in stabilizers" which might be likened to the shock absorbers and springs of a car. Changes in corporate profits and in government income trans-fer payments (particularly unem-ployment compensation ) have off-set more than half of the decline in the gross national product in each of the three recessions shown. As a result, personal income be-fore taxes- income actually allo-cated to individuals - declined only 5. 5 billion dollars in the 1948 recession and less than that in the 1953-54 and 1957-58 recessions. The progressive structure of personal income tax rates has had a further buffering action-equiv-alent to 20 percent or more of the decline in personal income. (The drop in personal taxes during 1953-54 is partly the result of a cut in the general level of federal income tax rates in each income bracket. ) So disposable personal income after taxes declined by less than 4 billion dollars in two of the recent recessions and actually increased by 2 billion during the 1953-54 recession. Consumers vary their rate of saving under different circum-stances. And they usually do so in such a way as to further in-sulate the stream of personal consumption spending from the effects of a decline in disposable income. In two of the recent re-cessions, personal consumption spending actually rose a trifle. And in the most recent one, it de-clined by less than 1 percent. The most surprising discovery is that, during 1948-58, the Amer-ican corporation acted as the most important shock absorber between variations in the gross national product and differences in the per-sonal income stream! This buf-fering role of the corporation wasn't assigned to it by Act of Congress, nor was it consciously Effects of buffers and built-in stabi lizers bet ween gross national product and personal consumption spending during three economic recessions, 1948-58. Changes from peak to trough (billions of dollars) 1948-49 1953-54 1957-58 Gross national product at peak. . . . . .. . . . . . . • . . . . • . . . . . . 265.9 368.8 445 .6 Less gross national product at trough. . . . . . . . . . . . . • . . . . . . . . . . . 2 56.4 358.9 425.8 Equals: - ----------Change in gross national prcduct. ............ . ....... . . . ... . .. - 9 .5 -9.9 - 19.8 Less change in depreciation , indirect business taxesn . .......... . . + 2 .3 - 0.7 - 1.7 Equals: -----------Change in national income . . . . . ... .. ....... . ............. .. . . - 11.8 -9.3b -18.1 Less change in corporate profits, government transfer paymentsC. .. - 6.3 -8.2 - 13.6 Equals : - ----------Change in personal income ... . . . ... . ... . . .. . . .... ... .... ... - 5.5 - I.I - 4.5 Less change in personal taxesd . ......... .. .... . ... .. ..... . .... - 1. 7 -3. l e - 0.8 Equals : ----- ------Change in disposable personal income . . ....... • ... ......... ... .. - 3.8 Less change in personal savings . . . .. .. .. . .. .. .. ....•. .. . . .... - 4. 1 +2 .o - 1.3 - 3.7 - 1.6 Equals: - ----------Change in personal consumption· expenditures ... . ............. . ... + 0.3 aAJso involves three other minor items. hSJight discrepancies due to rounding. cAJso includes six other relatively stable items. dAJso includes "personal nonta."{ payments," a relatively small item. •Decline partly attributable to a reduction in federal income tax rates. +3.2b Source: Survey of Current Busi11m, July 1958, pp. 13- l S; economic Indicators, Sept. 1958. - 2. 1 developed as a public service by the corporations. Apparently it simply evolved, step by step, out of the cost structure of large-scale enterprises, the nature of the in-vestment market and corporate attitudes toward the financing of new plant and equipment. Taxes on corporate net incomes average about 50 percent. The reduction in corporate tax pay-ments ranged from 2.6 to 5.9 bil-lion dollars in the last three reces-sions. And corporate profits after taxes also declined by from 3 billion to more than 6 billion dol-lars in each. But corporate divi-dend payments showed reductions of only from 0.2 to 0.4 billion dol-lars from a basic level that now exceeds 12 billion dollars a year. To maintain dividends, corpora-tions have accepted sharp fluctu-ations in undistributed profits. A "Smooth Ride" . . . The effect of these various built-in stabilizers and buffers has been to give the American consumer-and all parts of the economy de-pendent on personal income ex-penditures-an incredibly smooth ride during the past decade. It's doubtful that any economist in the late 1930's or early l 940's would have hoped for such a high level of performance or would have accepted the responsibility for achieving it. It may be, of course, that events (some in the international arena) have fallen in a time pattern par-ticularly favorable to domestic economic stability. And the road ahead may be rougher, at least in spots, than the one we've just traveled in 1948-58. Farm Effects . . . Now let's turn to the effects of economic instability on farm prices and incomes during 1948-58. Food products make up some-thing like 80 percent of the total domestic use of farm products in the United States. And changes in disposable personal income is the economic factor that gener-ally brings about changes in the demand for food. Generally the degree of insta-bility in the nonfarm economy during 1948-58 was small. The buffering action of built-in stabi-lizers and corporate dividend pol-icies was large. The result has been that recessions in consumer mcome have been almost negli-gible. The Future Somewhat larger fluctuations in gross national product are pos-sible, but much deeper recessions are improbable. And the buffers and built-in stabilizers would greatly mitigate them if they com-menced-nor have the means now available for deliberate interven-tion been overtaxed. It's conceivable that our eco-nomic defenses have held because they haven't been seriously at-tacked. There have been other periods of 8-10 years in which only little cycles have occurred, to be followed later by big ones. But the new features built into the economy and national policy since the l 930's aren't imaginary or illusory! They've worked rather well, and, in most cases, we understand why they've worked. This promises well for our ability to meet future chal-lenges to economic stability. Job Opportunities . . . The effects of economic insta-bility on labor mobility, off-farm migration and job opportunities for farm people are less conclu-sive. Does any recession, for ex-ample, imply that no farm people can find jobs in the nonfarm econ-omy? If not, then the problem is to discover how much the prob-ability of young farm people ob-taining nonfarm jobs within rea-sonable lengths of time is reduced by recessions of particular severi-ties. We've noted that employment in government, service industries and in finance, insurance and real estate actually increased in each of the three recent reces-sions and that declines in total civilian employment averaged only about 3 percent. Despite an aver-age decline of 13.2 percent in employment in durable goods manufacturing industries, there appeared to be good prospects for employment in other lines. Furthermore, wage rates in dur-able goods industries are high relative to those in some of the activities that expanded during the recessions or that contracted only slightly as did wholesale and retail trade. And this latter cate-gory included more workers than did durable manufacturing. Unemployment compensation for workers in durable goods man-ufacturing is high enough to act as a "support price" and to keep the workers laid off by car and steel manufacturers, for example, out of the labor market for sev-eral weeks or even months until their particular industries revive. Government unemployment com-pensation is supplemented in some industries by negotiated supple-mental unemployment benefit plans. To the extent that surplus labor from manufacturing industries is "stored" in this fashion, opportu-nities for farm people to move into nonmanufacturing occupations are only slightly impaired by a reces-sion. And nonmanufacturing oc-cupations account for more than two-thirds of total nonfarm em-ployment. In the 1953-54 recession, the decline in total nonfarm employ-ment was 3. 7 percent for the na-tion as a whole--but ranged from 7 percent in the heavily industrial-ized East-North-Central Region to only 1.9 percent in the West-South-Central Region. The 1953-54 recession, like our other recent recessions, was concentrated in the durable goods manufacturing industries. Thus, 84 percent of the variation among the regions in the recession decline in employ-ment was associated with the per-centage of nonfarm workers em-ployed in durable goods industries at the beginning of the recession. Other studies also show consid-erable variation in unemployment conditions during the recession among the different metropolitan areas or labor markets around the nation. And the implication of these diverse patterns also is that there must be considerable re-gional and local variation in em-ployment opportunities for farm people as well as others during the course of a "national average" re-cession. 5-289 

Do We Have Depressions Licked?

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Do We Have Depressions Licked?

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