Employment Act

Date February 20, 1946

The Full Employment Bill of 1945 was intended to create a partially planned economy, in which the federal government would modify its own spending patterns each year in order to compensate for projected shortfalls or surpluses in U.S. employment. The bill was drastically changed, however, and the Employment Act of 1946 merely instituted a general policy of preventing depressions and high inflation levels whenever possible.

Also known as Public Law 304, 79th Congress; U.S. Code Title 15, sections 1021 et seq.

Locale Washington, D.C.

Key Figures

• Harry S. Truman (1884-1972), president of the United States, 1945-1953
• James Edward Murray (1876-1961), U.S. senator from Montana, 1933-1960
• Edwin Griswold Nourse (1883-1974), chairman of the CEA, 1946-1949
• Leon Hirsh Keyserling (1908-1987), vice chairman of the CEA, 1946-1949, and later chairman, 1950-1953
• John D. Clark (1884-1961), member of the CEA, 1946-1950, and later vice chairman, 1950-1953
• John Maynard Keynes (1883-1946), British economist

Summary of Event

During the last months of World War II, people in the United States looked ahead anxiously to the nation’s postwar economy. Their gravest worry was the possibility of a catastrophic depression. When the war ended, the nation would face the immediate task of demobilizing eleven million members of the armed forces and converting from a wartime to a peacetime economy. As soon as possible, a war-weary nation hoped to scrap price controls and rationing, cut taxes, and turn industry back to the production of consumer goods, such as automobiles. Still, the memory lingered of the Great Depression of the 1930’s, with its mass unemployment, farm foreclosures, bank failures, and idle factories.

It was commonly recognized that the shift to a wartime economy, which had channeled billions of dollars into manufacturing and other sectors of the U.S. economy, had been largely responsible for the economic recovery after the Great Depression. Americans therefore recognized a possibility that the sudden end of wartime spending could plunge the nation back into depression. By early 1945, many economists were predicting that eight to ten million Americans would be unemployed when the returning troops were released from service. However, the levels of production, income, and employment reached during the war had given the United States a taste of a full-production economy. After the sacrifices of war, people were determined to settle for nothing less than the prosperity that they believed the economy was capable of generating. In 1944, the Democratic Party platform included a guarantee of full employment after the war; the Republicans made virtually the same promise.

On January 22, 1945, Senator James Edward Murray introduced a full-employment bill in Congress. The bill asserted that “all Americans able to work and seeking work have the right to useful, remunerative, regular, and full-time employment. . . .” Furthermore, it was the government’s responsibility “to provide such a volume of Federal investment and expenditure as may be needed to assure continuing full employment. . . .” The bill directed the president to present a forecast of aggregate demand for goods and services throughout the economy, compare it with the level needed for full employment, and recommend changes in federal spending to remedy any shortfall or excess.

Murray’s Full Employment Bill passed the Senate (with amendments) on September 28, 1945, by a vote of 71 to 10 and was endorsed by President Harry S. Truman. Over the next year, however, the Murray bill underwent a drastic metamorphosis. Congressional conservatives cut out any federal guarantee of the right to a job or of full employment. They also reduced the force of the government’s commitment to forecasting and eliminated specific mention of public works and other kinds of compensatory spending. The final version of the bill passed both houses of Congress as the Employment Act of 1946—tellingly, since the original bill would have been named the Full Employment Act. It was signed into law by President Truman on February 20, 1946.

The final law contained two main provisions. The first committed the government “to promote maximum employment, production, and purchasing power.” In practice, this strange wording came to be seen as a mandate to avoid significant depression or inflation. Second, two agencies were established to carry out the commitment. Congress set up the Council of Economic Advisors (CEA), consisting of three economists, to assist the president in drawing up an annual report on the state of the economy. In Congress, a Joint Committee on the Economic Report—later renamed the Joint Economic Committee (JEC)—was to review the president’s report and make recommendations of its own. President Truman soon appointed Edwin Griswold Nourse, Leon Hirsh Keyserling, and John D. Clark as the first members of the Council of Economic Advisers.

The Employment Act was a statutory expression of what the United States had learned during the Great Depression and World War II. The act’s spiritual father was British economistJohn Maynard Keynes. In 1936, Keynes had published his landmark work The General Theory of Employment, Interest, and Money. Keynes did not endorse fashionable proposals for nationalization or economic planning of specific industries. Rather, he argued that government could help a free market to work well if it used monetary and fiscal measures to help stabilize the aggregate demand for goods and services. A nation, Keynes argued, could actually pull itself out of a depression if the government stimulated the economy through deficit spending for public works and other purposes.

As evidence in support of Keynes’s theories, many people pointed to the rapidity with which the U.S. economy was restored to full employment when federal defense spending skyrocketed beginning in 1940. The ambitious provisions of the original Full Employment Bill assumed that government economists could accurately forecast undesirable declines or increases in aggregate demand and that government could easily offset these economic oscillations with fiscal measures, such as spending increases or tax-rate changes. Skepticism about both of those propositions lay behind the scaling down of the bill’s scope.

Significance

From the end of World War II through the end of the twentieth century, every president employed the philosophy and machinery of the Employment Act to keep the economy from falling into a dangerous boom-and-bust cycle. In the immediate postwar years, Truman faced a confusing economic situation that was just the reverse of what experts had predicted—shortages instead of surplus and inflation instead of depression and deflation. These problems became acute during the Korean War, and both the CEA and the JEC contributed significantly to research on managing the economy under renewed war conditions. Their influence helped persuade Congress to increase tax rates so the war would not lead to large federal deficits.

Experience soon demonstrated some problems inherent in the workings of the Employment Act. The first chairman, Edwin Nourse, visualized the CEA as a relatively nonpolitical body reflecting the technical expertise of professional economists. Realistically, however, the CEA had no clientele or constituency of its own, and therefore no real political power, except in relation to the president; therefore, CEA members have generally been chosen based on their conformity with the outlook of the president. This has meant that the likelihood that the CEA will shape the president’s economic views is not great. A second issue arises because the Federal Reserve System, which potentially has a large influence on demand management policies, is relatively independent of the president and therefore of the CEA.

In 1978, the Employment Act was significantly extended by the Full Employment and Balanced Growth Act (also known as the Humphrey-Hawkins Act), which established nonbinding targets of 4 percent unemployment and 3 percent inflation, to be achieved by 1983. The unemployment target has generally been recognized as unrealistic, however. The inflation target has been achieved fairly consistently, although inflation has at times risen as high as 13.3 percent during the economic crisis of the late 1970’s. The Humphrey-Hawkins Act directly addressed the issue of Federal Reserve Board policy, instructing the Federal Reserve to report directly to Congress concerning the relationship between its policy targets and the goals articulated by the act.

Bibliography

Bailey, Stephen K. Congress Makes a Law: The Story Behind the Employment Act of 1946. New York: Columbia University Press, 1965. Very few pieces of congressional legislation have been so meticulously documented. Captures the personalities and interest-group infighting, and discusses the role of economic analysis.

Canterbury, E. Ray. The President’s Council of Economic Advisors: A Study of Its Functions and Its Influence on the Chief Executive’s Decisions. New York: Exposition Press, 1961. Describes the council’s growing importance during the 1950’s and 1960’s.

De Long, J. Bradford. Keynesianism, Pennsylvania Avenue Style: Some Economic Consequences of the Employment Act of 1946. Cambridge, Mass.: National Bureau of Economic Research, 1996. Pamphlet evaluating the Employment Act and the theories of John Maynard Keynes that informed it.

Flash, Edward S. Economic Advice and Presidential Leadership: The Council of Economic Advisors. New York: Columbia University Press, 1965. A political scientist examines both the structure of the CEA within the government and the personal roles of Keyserling, Arthur Burns, and Heller.

Nourse, Edwin G. Economics in the Public Service: Administrative Aspects of the Employment Act. New York: Harcourt, Brace & World, 1953. The first chairman of the CEA explains the conflict between detached expertise and political partisanship and describes conflicts within the CEA between himself and Keyserling.

Stein, Herbert. The Fiscal Revolution in America. Chicago: University of Chicago Press, 1969. Stein, a member of the CEA under President Richard M. Nixon, effectively describes the impact of Keynesian ideas on the management of government financial policies.

Walton, Gary M., and Hugh Rockoff. History of the American Economy. 8th ed. Fort Worth, Tex.: Dryden Press, 1998. Massive, comprehensive study of American economic history includes sections on the postwar growth of the federal government and changes in U.S. labor and employment since 1946.