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75 years after its passage, the Employment Act still shapes federal economic policy

Two Minnesotans, economist Walter Heller and Sen. Hubert Humphrey, helped determine the way the law is applied today.

President Harry Truman signing the Employment Act of 1946 on Feb. 20, 1946.
President Harry Truman signing the Employment Act of 1946 on Feb. 20, 1946.
Library of Congress

February 20 marks the 75th anniversary of the Employment Act of 1946. You might ask, so what? Why should we care about a 75-year-old law? Here are two reasons: The debates over President Biden’s American Rescue Plan are taking place in the context created by the Employment Act of 1946 and subsequent legislation, and Minnesotans played key roles in creating this economic policymaking world.

The Employment Act of 1946

Congress enacted the Employment Act of 1946 in the wake of the Great Depression and World War II. The wartime experience, in particular, demonstrated that the US economy was capable of producing goods and services at levels far beyond what businesses and policymakers thought possible in 1940. The question Congress started debating in 1945 was the role the Federal government could or should play in maintaining these levels of output and employment.

The original legislation, entitled the Full Employment Bill of 1945, set out a sweeping goal:

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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. (Emphasis added.)

This statement was bold and direct but, as with so much legislation, passing it involved compromises on top of concessions layered with ambiguous phrasing. (An entire book about the Act , Congress Makes a Law: The Story Behind the Employment Act of 1946, by Stephen Kemp Bailey, is still considered a political science classic.)

The Employment Act of 1946, in its final form, contained a more cautious and equivocal statement:

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 competitive enterprise and the general welfare, conditions under which there will be afforded useful employment opportunities, including self-employment, for those able, willing, and seeking to work, and to promote maximum employment, production, and purchasing power.

The most long-lasting effect of the Act was that it set up an institutional structure for macroeconomic policy. First, it established a Council of Economic Advisors “to appraise programs and activities of the Government… and to formulate and recommend national economic policy to promote employment, production, and purchasing power under free competitive enterprise.”  Second, it required the president to submit an annual economic report to Congress. Third, it created a Joint Economic Committee of the Congress “to make a continuing study of matters relating to the Economic Report.”

The Employment Act’s goals were quite broad and open to interpretation, and it was easy for both Congress and the president to ignore them, especially under Presidents Truman and Eisenhower.  This changed because of two Minnesota connections.

Walter Heller: Applying the Employment Act to policy

In 1961, on the recommendation of Minnesota Senator Hubert Humphrey, President Kennedy appointed Professor Walter Heller of the University of Minnesota as chair of the Council of Economic Advisors. Heller transformed this sleepy council from a quiet, data-gathering office in the 1950s into a vibrant White House economic think tank dedicated to the idea that government policy can play a constructive role in economic affairs in the 1960s and beyond.

Heller later wrote that under Presidents Kennedy and Johnson there was:

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a shift in policy focus from moderating the swings of the business cycle to achieving the full-employment potential of the economy.  It was not enough simply to reverse recessions and temper expansions.  Success was to be measured in terms of hitting a moving target, namely, the rising full-employment potential of the economy.  The point was to close the gap between actual and potential output without triggering inflation (Source: Walter W. Heller, “Kennedy Economics Revisited,” in Economics in the Public Service, p. 238).

Heller had reason to be sunny.  The economy was in the midst of its longest peacetime expansion up to that time, one that began in 1961 and ended in 1969, according to the National Bureau of Economic Research.

Hubert Humphrey and the dual mandate

This happy state of affairs didn’t last.  Starting in 1967-68 and continuing into the early 1980s, both inflation and unemployment crept upwards. This surprised many economists, including Heller, as they thought there was a stable trade-off between inflation and unemployment. One could have low unemployment or low inflation but not both. But then during the early 1970s inflation continued to rise without a corresponding fall in unemployment.

In the midst of this, Hubert Humphrey returned to the Senate in 1971 after his 1968 run for president. Rather than being appointed to prestigious committees such as Finance and Foreign Relations, he “ended up on Government Operations and Agriculture and, because nobody else wanted it, on the Joint Economic Committee,” according to biographer Carl Solberg. This turned out to be fortuitous for economic policy.

Solberg writes, “Humphrey pored over abstruse [economic] reports…  Enlisting the help of his old friend Walter Heller…he put on several ‘presentations’ – hearings at which he drummed on unemployment, deficits, the dollar drain, the administration’s ‘lack of monetary restraint’ and fiscal policies.” All this convinced Humphrey that Congress needed to revisit the Employment Act.

Humphrey and his House colleague Augustus Hawkins (D-CA) decided to focus on a policymaking institution that was left out of the Employment Act: the Federal Reserve. Their legislation, known formally as the Full Employment and Balanced Growth Act of 1978, but colloquially as the Humphrey-Hawkins Full Employment Act, amended both the Employment Act and the Federal Reserve Act of 1935. The legislation tasked the Federal Reserve with maintaining “maximum employment” and “stable prices,” the latter of which is usually interpreted as a low inflation rate. It also required the Federal Reserve chair to submit reports on monetary policy to the Joint Economic Committee twice each year.

The focus on employment and inflation has come to be known as the Fed’s “dual mandate.”  The dual mandate sets the Fed apart from most other central banks, such as the European Central Bank, which focus exclusively on inflation without regard to employment. By contrast, Humphrey-Hawkins requires the Fed to set monetary policy in such a way as to keep both the inflation rate and the unemployment rate low and stable. Solberg noted that it was “the one measure that carried Hubert Humphrey’s name.”

From 1983 to 2007, the dual mandate was so successful that the period came to be known as the Great Moderation. Inflation averaged 2.5 percent per year over the period and the unemployment fluctuated much less than before, staying around 5 percent over the period.

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Macroeconomic Policy today

Will Biden’s American Rescue Plan “promote maximum employment, production, and purchasing power” as directed by the Employment Act of 1946? The Congressional Budget Office recently opined that the $1.9 trillion package might be too big, causing the economy to go past its productive potential and raising inflation. By contrast, two scholars at the Brookings Institution analyzed the proposal and concluded that $1.9 trillion was about right.

No matter which forecast is correct, we are living in the world of economic policy created by the Employment Act of 1946 and Humphrey Hawkins Act of 1978.