13 August 2011

Federal budget cuts in 1959 restrained an economic recovery. Hear that, Washington?

I just finished reading the book Dwight D. Eisenhower by Tom Wicker, part of the American Presidents book series by Times Books, the book-publishing arm of the New York Times Company. In the wake of Congress' current budget-cut debate and the recession, I came across this narrative of the 1959 budget agenda (pp. 113-114):
Neither for the first nor last time, Eisenhower had misjudged the Democrats. In 1959, rather than being profligate spenders, they decided to outdo the president in reducing federal expenditures. By the time the two congressional parties were done leap-frogging over each other in ever bigger spending cuts, the fiscal 1960 budget they adopted featured a $269 million surplus. That may have please the White House but the inescapable economic fact was that such a dramatic one-year swing in federal spending—from a $13 billion deficit to a nearly—virtually strangled the economic recovery that had begun in April 1958.

In 1959, moreover, the Federal Reserve, which had been ritually keeping money tight since 1956, actually raised the crucial discount rate from 2.5 to 4 percent. Restrictive fiscal and monetary policy combined resulted in the shortest economic expansion of the post-war year, and in April 1960 the economy began sliding into a new recession, which was to last into 1961.
Vice President Richard Nixon would run for president in 1960 and lose against Senator John F. Kennedy, a Democrat from Massachusetts. According to Wicker, "economic recession was prominent among the many factors that gave John F. Kennedy his razor-thin victory" (114). Similarly, I predict that a recession will influence a Republican victory over President Obama in the 2012 election. Poor economic conditions often influence voters to vote against the political parties in power. It happened in 1960, when voters decided not to elect the termed-out Republican Dwight Eisenhower's vice president to the highest executive position and instead opted for the Democrat, JFK. Similar thing in 1980 following an energy crisis and rising unemployment, when the incumbent Democratic president Jimmy Carter lost to the Republican former governor of California, Ronald Reagan (who would win re-election in 1984 despite a yearlong recession during his first term). In 1992, President George H.W. Bush (R) lost his re-election bid to the Democratic governor of Arkansas, Bill Clinton after compromising with Congressional Democrats to raise some taxes to reduce a budget deficit and rising unemployment in 1991 and 1992.

(update) Note how during the 1950s the top tax rate was...91%...a possible contributing factor to the 1959 surplus. Although the late '90s also had budget surpluses, the top tax rate then was a much lower 39.6%.

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