THE ROLE OF FEDERAL FISCAL POLICY IN THE 1957-60 BUSINESS CYCLE*

Abstract

THIS PAPER HAS a twofold purpose. The first is to evaluate the impact of federal expenditure and tax policies during the 1957-60 recession and recovery. The second is to explore the possible effect that alternative expenditure and tax policies might have had on economic stability during this period. The paper tries to answer two questions: What were the shortcomings of fiscal policy during the 1957-60 recession and recovery? To what extent might it be possible to remove these shortcomings in the future and therefore increase the effectiveness of fiscal measures as a countercyclical force? The analysis of 1957-60 fiscal policy will be carried out in Part II. It will be argued that the major shortcoming of this policy was the timing of discretionary expenditure measures. To a large extent, these discretionary measures were either not taken until the recession trough had been reached or, if they were taken before the trough, produced the great bulk of their effects after the trough. Relatively little scope appears to exist for increasing the built-in flexibility of the fiscal system, which, indeed, turned in a fairly good performance. The long lead time between the enactment of discretionary fiscal measures and their impact on public and private spending, however, poses a difficult problem in the effective use of the fiscal system as an instrument for combating recession. Part III of the paper attempts to assess three different approaches that have been urged as solutions to this problem of the long lead time of discretionary expenditures. These approaches are (1) the