Money, Banks and Finance in Economic Thought

The quest for full employment in the early postwar USA. Definitional issues and policy debates

Paesani Paolo, University of Rome Tor Vergata; Department of Economics and Finance
Palumbo Antonella, Roma Tre University, Department of Economics

Full-employment policies had their heyday in the aftermath of World War Two and in the following years, in the context of postwar reconstruction and the predominance of Keynesian thought. In the United States, the Employment Act of 1946 committed the Federal Government to “coordinate and utilize all its plans, functions, and resources … to foster and promote free competitive enterprise and the general welfare; conditions under which there will be afforded useful employment for those able, willing, and seeking to work; and to promote maximum employment, production, and purchasing power”. The Act is generally considered as having introduced full employment as a political commitment for the Government (J.B. De Long 1996). This goal would remain central to the economic strategy of subsequent US administration until the 1960s together with active demand management. In those years, the Council of Economic Advisers, an institution established by the Employment Act itself, was very active in setting quantitative targets and in framing the policies to attain them. The Economic Reports of the President that the Council produces from 1947 on are thus a precious source of information on the practical content of those ‘Keynesian’ policies. Prominent economists participated in the activities of the Council and in policy debates at the time, elaborating new estimation techniques to measure full employment. A.M. Okun (1962) famously proposed to estimate US potential GNP as a way to address the question “how much output can the economy produce under conditions of full employment”. Okun’s indication of 4 percent, as a measure of full employment, was considered greater than the measure of ‘true’ full employment (then regarded in the vicinity of 3 percent according to Schwarzer 2018, see for example Bronfenbrenner and Holzman 1963) by a sufficient margin to check for excessive inflationary pressures. Strictly related to the policies for full employment was the debate on inflation. According to Schwarzer’s (2018), 3 percent unemployment was then considered as generating, in the USA, a rate of inflation between 4 and 5 percent, something that “conflicted with the goal of price stability”. The goal of this paper is to reconstruct the policy debate on the nexus between full employment and price stability in the USA between the 1950s and early 60s, building on official US archival material (e.g. Joint Economic Committee of the US Congress) and other sources. This reconstruction appears of particular relevance in connection with current debates on the inflation-unemployment relationship, and the critical reappraisal of the notion of the natural rate of unemployment, fifty years after Friedman’s and Phelps’s re-examination of the Phillips curve (see for example the debate in the Review of Keynesian Economics, Vol. 6, No. 4, Winter 2018).

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Keywords: Full employment, Potential output, Keynesian economic policy, Phillips curve

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