The Employment Act of 1946

The Economic Context
Postwar Proposals
What Was in the Proposed Full Employment Bill?
Congressional Debates
*Interpreting the Past
*Goals
*Feasibility
*Method
*Forecasting
*Institutionalization
Results – Final Bill
Results – Economic Performance
Further Reading

The Employment Act was one of the defining moments in the history of American Keynesianism. Pushed by the left-wing of the New Deal coalition as the culmination of all that the 1930s and World War II had promised, it was supposed to enshrine full employment as the nation’s goal and the right to a job as the citizen’s entitlement.

The result was less lofty than that, but the Act still provides the basic architecture for our political macroeconomy today. Hence we start an examination of American Keynesianism with a discussion of what this act was supposed to promise and what it wound up creating.

The Economic Context

In the years leading up to the Act, the US had been rocked by the Great Depression and World War II. Wild swings in employment, output, and prices had knocked loose any sense that the economy was stable.

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Indeed, Henry Wallace – on whom more in a later post – circulated the following data widely, as an indication of the idea that the economy was becoming less self-correcting over time. The gap between the number of jobs out there and the labor force was widening. There just wasn’t that much demand for labor – and there was less every year, some thought.

Obviously, something needed to be done about this. The Employment Act was the culmination of New Deal macroeconomic thinking – the government would have to look after the general conditions of employment in the economy. But how?

Postwar Proposals

There were many proposals for what to do with the economy after the war. Senator Kilgore, for instance, wanted a “Bureau of Programs” in the Office of War Mobilization and Reconversion to be responsible for “full employment and production planning.” He envisioned it utilizing all the techniques of war mobilization, used to such spectacular effect in the war against fascism, to assure the economy was operating at full capacity in peace time too.

But it was James Patton, president of the Farmer’s Union, who led the way on a national commitment to the goal of full employment. Russell Smith, the legislative representative of the Farmer’s Union, became well known on the hill, pushing for legislation that would offer loans and direct expenditures to bring total investment (private plus government) up to $40 billion, which Washington economists had told him was the requisite amount for full employment. Eventually, the project found its Congressional champion in Senator James Murray of Montana, chairman of the War Contracts Subcommittee of the Senate Military Affairs Committee. He in turn handed it off to a group of Keynesian economists (on whom more later).

They wrote a first, “expert draft” of the Full Employment Bill of 1945. This was then watered down a bit to head off objections from the opposition. To ward off accusations of socialism and communism, they added the stipulation that everything would have to have the additional goal of “fostering free competitive enterprise.” The government’s “responsibility” for full employment became a “policy” of promoting full employment. And so on. But these changes were just semantic they hoped.

What Was in the Proposed Full Employment Bill?

The Full Employment Bill of 1945 started with a “Declaration of Policy.” It declared:

All Americans able to work and seeking work have the right to useful, remunerative, regular, and full-time employment, and it is the policy of the United States to assure the existence at all times of sufficient employment opportunities to enable all Americans who have finished their schooling and who do not have full-time housekeeping responsibilities to freely exercise this right.

Section 1, Full Employment Act

Section 2(c) required the federal government to “provide such volume of Federal investment and expenditure as may be needed to assure continuing full employment.”

Section 3 specified in greater detail the process by which this would be accomplished. The President would submit two documents to Congress at the beginning of every regular legislative session:

• A report, which in turn had two components:
  • An estimation of the relationship between output and employment – how much output would the US need to produce in order to generate enough employment opportunities?
  • A forecast of the level of output in the absence of government intervention in total spending.
• A “National Employment and Production Budget” that would include a large enough budget deficit that total spending would come into line with the requirements for full employment levels of output.

Congressional Debates

Although Alvin Hansen would later call it “a great Magna Carta of government planning for full employment,” no Congressmen at the time thought about it in such foundational terms. Instead, the Employment Act is better seen as the marking of a moment – a moment when Americans decided they were in favor of more government responsibility over the economy. No one seriously contested the post-Great Depression consensus that the federal government had to do something about employment for average citizens. The questions were “what?” and “how?”

In the Congressional debates, more than a few compromises had to be added to what was already a watered-down bill. Proponents of the bill described this process as its “emasculation” – their favorite word for attacking amendments, which incidentally indicates how much gender dynamics were playing a part in these back-and-forths. They wanted a “muscular” central government and “rational” planning system; opponents feared the loss of “self-reliance.”

But for outsiders, the significance of the amendment process could be difficult to understand, since many of the key terms in the original bill were not well defined. Even the bill’s proponents admitted that they didn’t know what exactly “full employment” was, or what made it so different from the language that ultimately became law – which they bitterly resisted – targeting a goal of “maximum employment.”

Still, several meaningful dimensions of the debate can be identified.

Interpreting the past

The Great Depression had convinced everyone that some kind of intervention to support employment was necessary. But what kind? The left-wing of the New Deal thought that a continuous, year after year intervention to prop up total spending would be required. They looked at Wallace’s data and saw a widening gap between full employment and actual employment levels, and thought that constant planning and programming would be necessary to close it. Only with World War II had the gap of the Great Depression closed. What would happen if that funding was all withdrawn at once?

The congressional debates and hearings are filled with assertions that “the history of employment and production in the United States is a record of boom and bust. It is a record of brief periods of growth and development culminating in peaks of prosperity that gave way to disastrous collapse;” or that “private enterprise, left to its own devices, cannot provide full employment and cannot eliminate periodic mass unemployment and economic depressions.”

In addition to the data, there was the memory many had of demobilization after the First World War. After the Entente victory in 1918, the advanced capitalist world had entered a multi-year downturn that didn’t end in the US until 1921. In other European countries, the mini-depression lasted well into the 1920s. Most economic historians now agree that this was the result of restrictive monetary policy and continued political tensions resulting from the Treaty of Versailles. But in the early 1940s many Americans were looking back to their own history to plan for the future – and they did not like the idea that Depression, or even 1919, would be back again.

Opponents of the bill naturally tended to have a very different interpretation of the past – or rather, they had several interpretations, some of which were mutually exclusive, but they all pointed to the idea that stimulating aggregate demand wasn’t necessary, or might in fact be actually harmful.

Some suggested that the Depression had been a one-time freak accident, and that since 1933 the Recovery had been well underway. The shortfall in demand had been temporary – so yes, it had been acceptable for the government to step in and do what was necessary to get the economy going again, but now that the storm had passed there was no longer any justification for new programs, and certainly not a permanent aggregate demand planning process. They looked at Wallace’s data and failed to see an ever widening gap.

Goals

Most of the opposition, however, came in the form of bewilderment: how could citizens have the “right” to a job? How would such a right be enforced? And against whom? Opponents also feared that enshrining such a “right” in the law would lead citizens to expect too much from government – no state could ever possibly deliver on such a promise of a job for everyone. Plus, they argued, such a reliance on government was un-American. Citizens might rightfully look to government for help in extreme circumstances – but in normal times they should rely on themselves to get a job.

Although proponents put up a bit of a fight, pointing to the Declarations of Independence and the Rights of Man as precedent, they quickly admitted that they didn’t really intend to create an actionable right in the legal sense. “The statutory enunciation of the night to an opportunity for employment does not imply redress through the courts,” one Congressman admitted. It was meant more as a statement of purpose: it was the governments responsibility to hit full employment.

But what was full employment? No one could really tell.

Everyone at work? No – certainly no one wanted send everyone to work camps. Children and the elderly wouldn’t be expected to work. And given the gendered expectations about work at the time, even the initial proponents had made space to write in an exception for housewives, or those who “had full-time housekeeping responsibilities” – no one intended to give them a right to a job.

Work for all who wanted it? Yes, but not directly. Although the government would be responsible for propping up total spending in the economy, this wasn’t the same as the government hiring everyone who couldn’t find work. Even the proponents of the bill hoped to leverage the employment-power of the private sector to some extent.

So some proponents suggested that full employment could be defined as a situation where there were more job vacancies than there were unemployed people looking for work – that way, everyone who wanted a job would eventually have one. But even that was unsatisfactory – what if there were significant geographical mismatch, or if there was a skills gap that prevented the unemployed from finding the right jobs? One job vacancy was hardly equal to one unemployed worker, except in the very abstract.

Worse, what kind of jobs are we talking about here? The proposed bill implied that they would be “remunerative” – how remunerative? In the course of floor debate, proponents made it clear that they meant a wage of $2000 a year, the average income for non-agricultural workers in the private sector. This had all sorts of problems, not least of which was how it would be possible to offer above-average wages to everyone – or how the government would afford it.

Eventually the proponents just gave up trying to define full employment in the legislation. Future policy makers would have to give their own interpretation of those words, and set their own goals.

The real problem opponents had with full employment, however, was that it appeared to stand alone and absolute. However one defined it, it would put the federal government on the side of the workers, protecting their interests and propping up demand for their product – labor – instead of the capitalists’ or the farmers’.

Opponents weakened the bill by adding two additional goals. Hence, the final bill read that the government’s goals were “maximum employment, production, and purchasing power.”

Although no one seems to have clarified this at the time, officials quickly realized that the only reasonable interpretation of the “maximum purchasing power” goal was stable prices – hence an anti-inflation policy stood side by side with a “maximum employment policy,” whose meaning was left up for the future to determine.

Feasibility

Connected to interpreting the past and arguments about goals, opponents of the bill worried about whether full employment – or even maximum employment – was a feasible goal.

Many argued that the business cycle was natural – ups and downs were the result of a previous over-confidence correcting itself. Businesses which had overestimated demand for their product produced too much, and now their inventories were overflowing and they needed to cut down on production by firing workers. When too many businesses were too overoptimistic all at once, there was a recession. Coordinated overproduction could happen for many reasons:

1. perhaps a new technology got everyone too excited
2. perhaps a self-propelling bubble in asset markets led people to imagine they were wealthier than they really were
3. or perhaps it was monetary policy: authorities printed too much money, caused a general rise in the price level, and every business mistook this as a rising price for their particular good that should be met with additional production

Whatever it was, once this overconfidence was revealed, there would necessarily be a period of winding down – the price of pride is shame and the fall. Any policy that kept aggregate demand high would just prevent this adjustment process from happening. In the words of one Congressman, “The adoption of such a policy [deficit spending] would result in continued Federal spending over many years, causing an inflation of prices and an artificial boom, and then the very depression and unemployment we are trying to avoid.”

In the end, such objections were overridden by the force of the history of the Great Depression – there had to be some kind of legislation on employment, now that the World War had demonstrated how responsible government could be for the economy. Letting the “natural” ups and downs of the economy liquidate workers every dozen years or so just wasn’t an option anymore, and it was time to acknowledge that government responsibility in practice.

Method

But even if it was admitted that there was a widening gap between in aggregate demand and full employment, and even if “full employment” was admitted as a goal, and even if it were desirable to prevent downturns caused by overconfidence – how would the government be able to prop up aggregate demand?

The original bill would have committed the federal government to using “all means” to bring about full employment. But almost everyone – and especially the economists who drafted it – understood that the larger purpose was to put federal spending in the driver’s seat of the economy. Hansen told an interviewer that “everything but the spending provisions are window dressing.”

There were several ways of objecting to this. Some didn’t like federal spending on principle or interest – they favored low taxes and exclusively favored private economic activity. Senator Taft for instance, deep in the pockets of Wall Street, tried to pre-limit the size of deficits, on the theory that taxes were money better left to private capital to control.

Others simply wanted to speak up for other, more preferred policy options, such as tax cuts and monetary policy. This was the line of argument pursued by Beardsley Ruml and Paul Hoffman for the Committee for Economic Development, a thinktank/lobbying organization which tried to bend Keynesian theory in a more business friendly direction. They were joined by Allan Sproul from the NY Fed, Russell Leffingwell of JP Morgan, and several economists such as Henry Simons and Gottfried Haberler. All pointed out that for normal macroeconomic management, monetary policy would do just as well as deficit spending – and if deficits were what was required, say because monetary policy wasn’t powerful enough on its own, then tax cuts could cause a deficit just as well as increased spending could.

In the end, spending was not excluded, but it wasn’t given the leading role the original drafters had imagined for it either. It would be up to the judgement of future lawmakers just how to combine spending, taxes, and monetary policy.

Forecasting

The original bill required an economic forecast of aggregate demand for the next year. But, some Senators wanted to know, how reliable was economic forecasting, after all?

They asked Congress to consider “how wrong any estimate for 1930 would have been, if made in 1929” – and chided Keynesians for their prediction of another postwar slump, when in fact 1946 was a boom year as pent-up consumer spending from the war years was unleashed on soldiers’ return home. Just because 1918 turned out one way didn’t mean that 1946 would follow the same path. The debate had dragged on long enough for Congress to see the initial upturn in economic activity, as military planning demobilized more or less smoothly into postwar capitalism. But if the effects of demobilization were unpredictable, what made proponents of the bill so confident that government investment planning would be so much easier to forecast?

“Forecasting economic conditions 16 months ahead is a task for gods, not mortals … Look over the Department of Agriculture forecasts in the spring of the final crop for the year. Look at the … complete failure of the ICC to forecast economic conditions or earnings … What Government forecasts have ever been… equal to the average of blind chance? How much Government foresight is revealed in the Pearl Harbor report or in our prewar policy?”

Beardsley Ruml and colleagues argued that it was impossible to correctly forecast aggregate demand. Hence, they would go on to promote “automatic stabilizers” as a better policy tool.

But for now, opponents did not want to replace forecasting with something else – the simply wanted to eliminate this requirement, and they did.

Institutionalization

The original framers envisioned the President as responsible for forecasting, reporting, and programming through the Bureau of the Budget (since the budget was to be the chief instrument of policy). They didn’t want to provoke other parts of the Executive Branch, however, so they left the exact institutionalization of the process open, simply specifying the President as responsible.

Opponents seized on this ambiguity with a vengeance.

Both the economic analysis and the economic policy may be prepared and promoted by men unknown to the public, whose appointment has not been confirmed by Congress, and who have no formal public responsibility. This set-up invites behind-the-scenes manipulation by Presidential advisers of the moment, possessed, it may be, both by a passion for anonymity and a passion for controlling national economic policy.

George Terborgh of the Machinery and Allied Products Institute

Some wanted to make the expert policymakers not just visible but “high level.” They suggested an independent commission which had members of “business, labor, agriculture”; others suggested it could be composed merely of “leading citizens.” These would be analogous to other independent boards such as the Federal Reserve Board or the Federal Trade Commission, with members appointed by the President and confirmed by the Senate for five-year overlapping terms.

But ultimately, if the President were to be responsible – and such things could only really be done at the Presidential level – then he had to have trustworthy people that he could appoint and remove. Hence the creation of the Council of Economic Advisors, outside the Bureau of the Budget, appointed by the President and confirmed by the Senate. Far from constituting a “Supreme Court of Economics,” as many opponents feared and allies hoped, the CEA wound up being an advisory body which merely prepared non-binding Economic Reports of the President every year for Congress.

Results – Final Bill

Amendments thus succeeded in eliminating:

• the right to an employment opportunity
• the federal government’s responsibility to assure continuing full employment – instead targeting “maximum employment, production, and purchasing power”
• the requirement to submit a budget targeting a forecast of full employment – or even the exclusive use of spending to achieve its goal

Indeed, even the name was changed to reflect the new content.

The Employment Act of 1946 was thus more of a statement of intention than a requirement to act. It was more of a summary of the current zeitgeist – a crystallization of the balance of class forces at a particular moment in time and the world view that came out of that – rather than a concrete mechanism for rearranging the economy on a continued basis.

Final draft’s “Declaration of Policy”:

The Congress hereby declares that it is the continuing policy and responsibility of the federal government to use all practicable means consistent with its needs and obligations and other essential considerations of national policy with the assistance and cooperation of industry, agriculture, labor, and state and local governments, to coordinate and utilize all its plans, functions, and resources for the purpose of creating and maintaining, in a manner calculated to foster and promote free and competitive enterprise and the general welfare, conditions under which there will be afforded useful employment for those able, willing, and seeking work, and to promote maximum employment, production, and purchasing power.

Employment Act of 1946 (see the full text here)

Results – Economic Performance

What were the economic effects of this bill, or of the worldview which it represented?

Likely the biggest effect was the acceptance of automatic stabilizers – the increase in the deficit when recessions reduce tax receipts and increase welfare doles. No longer did politicians demand austerity in the face of recessions – at least not for the next half century. Instead, politicians largely let deficits happen in the short run, correcting the debt problem only in the long run.

There’s significant debate about what kind of effect this had – unemployment averaged 4.6% from 1950-1970, the same as the average for 1900-1929, which was about 4.5%. But no new Great Depression happened for the rest of the century, while the Keynesian consensus was maintained.

A second consequence was identified by Alvin Hansen ten years into the new era. By institutionalizing debate about the aggregate demand effects of the federal deficit, the Employment Act was likely the biggest and most significant education mechanism for the average citizen on the topic of macroeconomics. The CEA and the Joint Economic Committee – which was created by the Act to review the Economic Report of the President and propose legislation proper to the maintenance of the goals of maximum employment, production, and purchasing power – together exposed the country to rigorous, high level economic theory on a yearly basis.

As a result of the “emasculation” of the Full Employment Act, the Keynesian revolution in America largely had passive effects – automatic stabilizers that didn’t provoke austerity in a recession; education about macroeconomic theory. However, there were at least two instances of successful discretionary tax policy being used to fight recessions – the first in 1948 by luck, the second in 1964 by calculation. The history of these events will thus be the topic of the next blog post.

Further Reading

Online

• Aaron Steelman, Federal Reserve History series, entry on the Employment Act (here)
• C. J. Santoni, “The Employment Act of 1946: Some History Notes,” St. Louis Fed (here)
• Murray Weidenbaum, “The Employment Act of 1946: A Half Century of Presidential Policy-making.” Presidential Studies Quarterly (here)
• Bradford DeLong, “Keynesianism, Pennsylvania Avenue Style: Some Economic Consequences of the Employment Act of 1946,” Journal of Economic Perspectives, (1996) (here)

Offline

• Assuring Full Employment in a Free Competitive Economy. Report from the Committee on Banking and Currency, 79 Cong., 1 Sess. (Government Printing Office, September 1945).
• Assuring Full Employment in a Free Competitive Economy, Minority Views. Report from the Committee on Banking and Currency, 79 Cong., 1 Sess. (Government Printing Office, September 1945).
• Alvin H. Hansen “The Reports Prepared Under the Employment Act,” in The Employment Act Past and Future (National Planning Association, 1956) pp. 92—97.
• Stephen Kemp Bailey, Congress Makes a Law: The Story behind the Employment Act of 1946. New York: Columbia University Press, 1950.
• Herbert Stein, The Fiscal Revolution in America: Policy in Pursuit of Reality. AEI Press, 1996.