American Economic History: Managing the Macroeconomy

1. American Economic History: Managing the Macroeconomy J. Bradford DeLong Economics 113 November 14, 2007

2. The Employment Act of 1946 • Established Congress’s Joint Economic Committee • Established the Council of Economic Advisers • Called on the President to estimate and forecast the current and future level of economic activity • A that it was the “continuing policy and responsibility” of 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”

3. 1978 Humphrey-Hawkins • Required the Chairman of the Federal Reserve to testify before the Congress twice a year. • Committed the federal government to reducing the unemployment rate to four percent by 1983 and to maintaining it thereafter. • Committed the federal government to reducing the inflation rate to zero by 1988. • Called for the reduction of federal government spending to “the lowest level consistent with national needs.” • Called for spending more money on farm price supports.

4. Impact of Legislation • Humphrey-Hawkins has been a dead letter since its enactment. • The EA1946 has not been--it has been very alive. • Why the difference? • Laws have effects when they create institutions and processes • Laws have no effects when they simply endorse goals

5. Versions of the *Full* Employment Act of 1946 • Original: “National Production and Employment Budget” • To “assure a full-employment volume of production” starting six months hence • Final: an annual “Economic Report” • “setting forth… trends… [and] a program for… [promoting] conditions under which there will be afforded useful accountability of Federal Reserve actions, employment for those able, willing, and seeking to work.” • Truman administration dropped the ball on institutional coordination • Most executive branches since have picked it up

6. Nevertheless, EA46 a Great Leap • Compare pre-Depression theories: “Liquidationism” • Depressions a result of overoptimism • Depressions blowback from inflation • Depressions blowback from excess government spending • Complete victory of the Keynesians • Even the monetarists were Keynesians • Monetarists probably right in eschewing discretionary fiscal policy

7. Macroeconomic Management: A Balance Sheet • Successes: • Fiscal automatic stabilizers • The “Great Moderation” since 1984 • The placid 50s and the booming 60s • Failures: • The inflation of the 1970s • The structural deficits of the 1980s and the 2000s • Brennan and Buchanan’s warnings about Keynesianism uncorking the genie • Institutions and microeconomic management • The CEA • The JEC

8. The 1970s Breakdown • Jacob Viner (1936): “In a world organized in accordance with Keynes’s specifications, there would be a constant race between the printing press and the business agents of the trade unions, with the problem of unemployment largely solved if the printing press could maintain a constant lead…” • Richard Nixon (1970): “I know there’s the myth of the autonomous Fed [short laugh]…. When you go up for confirmation some senator may ask you about your friendship with the President. Appearances are going to be important, so you can call Ehrlichman to get messages to me, and he’ll call you…”

9. The 4% Solution • What is a good rate of unemployment? • Frictional unemployment • Structural unemployment • Cyclical unemployment • Can unemployment be too low? • Is unemployment ever too low? • Structural unemployment around the world…

10. Kennedy-Johnson-Solow-Samuelson • 4% unemployment as an “interim” goal • To fend off labor union pressure for an even lower goal • How to get there? • Jawboning • Grand bargains • The Phillips curve

11. Milton Friedman’s Challenge • The “natural rate of unemployment” • NAIRU • When you get below the NAIRU, somebody is being fooled • You can’t fool all the people all the time--or can you? • Costs of excessive activism • Volatility • Credibility • Degradation of the price mechanism

12. One D--- Thing After Another: the 1970s • The Vietnam War • Richard Nixon’s reelection • Ehrlichman in the men’s room… • Arthur Burns’s political loyalties • Arthur Burns’s pessimism • Wage-and-price controls • The 1973 Yom Kippur War • Henry Kissinger and the Shah of Iran • The Ford administration: Whip Inflation Now • The Carter administration: • The productivity growth slowdown • The misery index • The Iranian Revolution • G. William Miller • The appointment of Paul Volcker

13. What to Do? • Grand bargains… • Living with inflation: head colds and lobotomies • Price controls… • The Volcker solution • The Volcker disinflation • Britain: Thatcher’s MTFS • France: Mitterand • Germany and Japan

14. Friedman’s Promise I • High unemployment generated by disinflation will be temporary • But low unemployment generated by inflation will be temporary too • And the higher inflation will be permanent--without subsequent disinflation that is • And the voters hate inflation

15. Friedman’s Promise II • Friedman’s promise true in the U.S. • At the cost of the evisceration of the American private-sector union movement • Friedman’s promise much less true in Europe • Britain: the (eventual) triumph of Thatcherism • Continental Europe: the European unemployment puzzle

16. The Apotheosis of the Central Bankers • Paul Volcker • The rise and fall of monetary targeting • Alan Greenspan • Crash of 87 • Recession of 91 • The Wise Man of 93 • The dash for growth of 95 • Recession of 01 • The Bush enabler of 01 • The serial-bubble-blower of 02-04 • Ben Bernanke • Good luck, Ben