[This was something I wrote back in September 2021 on another, short-lived blog which no longer exists. I discovered there are a few links to it still floating around so I am reposting it here.]
The great steel strike of 1959: “In terms of person-hours idled it was, and would remain, the largest work stoppage in US history.”
In a recent research report from Employ America, Gabriel Mathy, Skanda Amarnath, and Alex Williams look to the 1950s for yet more evidence against the faltering conventional view of inflation (a view always framed explicitly or implicitly around the 1970s). I am in close sympathy with the project but I had a few reservations regarding the idea that the “1950s experience” was “a macroeconomic sweet spot of strong growth, low inflation and low unemployment,” and the related idea that the 1950s and the 1970s experiences do not speak to each other in any clear way. A few thoughts:
The 1950s should actually be broken into two periods, one of strong growth followed by an “Eisenhower stagnation.” From 1956-1961, real GDP growth averaged 2.6% annually. If you take out 1959, the strongest growth year, the average growth rate is just 1.7%. This is a marked slowdown compared to 1950-1955, when real growth averaged 5.3% annually (even with negative growth in 1954). As the chart below also shows, each expansion was not just weaker but also shorter than the last.
The Eisenhower stagnation coincided with inflation, which makes it in some respects comparable to the “stagflationary” 1970s. It must be said that this inflation was relatively mild by any comparative standard: CPI rose around 3.4% in 1957 and 2.7% during the recession year of 1958. Still, it made a big impression on people at the time.
One reason was the novelty of “stagflation” (that word had not been coined but people in the late 1950s did use terms like “recession-cum-inflation”). Despite the advances of countercyclical policy, the earlier postwar recessions (1949 and 1953) were still mildly deflationary, with multiple consecutive quarters of negative CPI change. Despite the fact that the 1958 recession was notably sharper than the previous postwar slumps (indeed, it was the sharpest since the 1930s), prices did not fall or even flatline, though the rate of inflation did eventually decelerate. This pattern would hold in subsequent recessions, making 1958 an important (and neglected) turning point in a story that usually begins in the 1970s.
The inflation of the second half of the 1950s, even if we judge it mild, did provoke contractionary fiscal and monetary responses. According to Allan Meltzer's history of the Fed, “growth of the real monetary base remained negative for more than a year before the end of the [1954-1957] expansion and declined at a rising rate early in 1957.” Once the recession came, “the Fed delayed major action until November, three months after the [business cycle] peak” and “tightened policy soon after recovery seemed assured.” On the fiscal side, the recession had been preceded by Eisenhower budget cuts (particularly in defense) and was followed by an economy drive that led to a budget surplus in 1960
These policies help explain why unemployment remained high relative to other postwar business cycles, even during the brief 1958-1960 expansion. There is also lots of evidence that the Fed believed its monetary anti-inflation would work through the channel of wage restraint. One example (from a valuable book by Edwin Dickens) is below; it is especially significant because the speaker, Hayes, had at one point been a relative dove but now embraced the position of the Fed's conservatives.
There is a lot more social history one could get into here. For example, “high levels of black unemployment became a permanent feature of the urban landscape after the 1957-1958 recession.” During the peak of the Korean War boom in 1953, nonwhite unemployment (the category used at the time) had fallen to 4.3%. Between 1958 and 1969, black unemployment never fell below 6.4 percent, and for almost three quarters of that period, the rate was above 8 percent.
The Eisenhower stagnation was also the context for a major, if little remembered, employers' offensive against unions. It was no coincidence that the recession came on the heels of 1956, a year in which unemployment dipped below 4%, wage growth accelerated, and labor productivity growth went negative. The episode fits easily within Michal Kalecki's famous sketch of the political business cycle . Capitalist not only experienced “1950-58 [as] a period of declining profit margins” they also “complain[ed] that they have ceased to be bosses in their own enterprise,” as the New York Times put it in a story on the “corporate rebellion” against workplace norms. Who could blame them if they grew “boom-tired”?
Though the Fed also saw itself as disciplining manufacturers who raised prices, they were basically in sympathy with the use of recession to restructure labor relations. By September 1960, one staff economist welcomed “the almost incredible fact that, despite all the upward biases associated with wages, hourly earnings of production workers actually declined from January to August.” This was, he said, one of “a number of the important adjustments that are ordinarily associated with a moderate recession in business activity.” (Note the date, circumstantial evidence that developments in labor relations were a condition of possibility for the Fed's openness to the Kennedy expansion).
JFK's "new economists" all saw the Fed as a major obstacle to the economic expansion they desired. Here is James Tobin writing in March 1958:
The Federal Reserve System can fight inflation with “tight money”; and beginning in 1956, we have been sacrificing some production, and some growth in our productive capacity, to the anti-inflationary objectives of the administration and the Federal Reserve. The evidences of the sacrifice are numerous: increasing unemployment, reduction in weekly hours of work and in overtime, withdrawal of women and young people from the labor force, retardation of the rate of growth of total output, decline of industrial production, excess capacity in steel and other industries.
In the 1960 campaign, Kennedy continued to push this theme, with a platform that promised: “As the first step in speeding economic growth, a Democratic President will put an end to the present high interest tight money policy.” In the end, the Kennedy administration reached an understanding with the Fed that permitted the beginning of the long 1960s boom. Though the Fed (William McChesney Martin) remained the same, there were a number of changes in policy that I won't go into here (the 1960s deserve their own post). Suffice it to say that, according to Hobart Rowen of the Washington Post, '“the financial community was amazed that martin would agree to try anything so unorthodox. As a matter of fact, Martin was privately abused by some on Wall Street who accused him of ‘selling out’ to Kennedy.”