A Durable Economic Plank

This year is the 50th anniversary of a landmark law, the Employment Act of 1946. The experience has neither been as bad as the opposition feared nor as substantial as the sponsors hoped. Viewed narrowly, the 1946 act has succeeded: The two agencies it established - the President's Council of Economic Advisers and the congressional Joint Economic Committee - are still in existence. Each has traversed a rocky path over the years but has contributed substantially to the policymaking process.

Originally the most controversial part of the law, the extended statement of policy has become generally accepted. Substantial government responsibility for the performance of the economy is now widely assumed. Politicians of the opposition party predictably hold the administration in office accountable for any economic shortcomings that occur while it's in power.

The metamorphosis of the Employment Act's statement policy - "to promote maximum employment, production, and purchasing power" - has mirrored the development of economic policy in the United States. Back in 1946, the prevailing Keynesian orientation centered on macroeconomics - and especially fiscal - policy. This reflected the desire to avoid the large-scale unemployment of the 1930s. Little attention was given either to inflation or monetary policy or microeconomic issues such as regulation and trade practices.

The debates of the 1960s and 1970s on the effectiveness of monetary versus fiscal actions changed the focus of economic policy. The Federal Reserve is now generally looked upon as the primary mechanism for achieving short-term stability. Tax and budget policies are viewed in terms of their longer-run impacts on investment, growth, and income distribution.

The original emphasis on "maximum employment" (a legislative compromise to break the deadlock that had developed over the term "full employment") has taken a back seat. In an especially creative way, the reference in the Employment Act to "purchasing power" has been used as the basis for government concerning itself with inflation.

This was made more explicit by the Full Employment and Balanced Growth Act of 1978 (usually referred to as the Humphrey-Hawkins Bill). That law, which amended the Employment Act of 1946, tells the Federal Reserve System to conduct monetary policy so as "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."

Under the Humphrey-Hawkins statute, the Fed regularly presents to the Congress a target range for growth in the money supply and economic performance. Little attention, however, is paid to those numbers. A simple repeal of the Humphrey-Hawkins Act would be a contribution to slimmed-down government.

On the other hand, some would modify the statement of policy with regard to the Fed, forcing it to put sole emphasis on fighting inflation. Of course, inflation is the central bank's primary concern. The Fed is the only effective anti-inflation mechanism in the government.

However, the Federal Reserve System does not ignore other aspects of economic activity, such as growth and employment - nor should it as it attempts to stabilize the economy. The system is properly restrained by the knowledge that the effects of its actions extend far beyond the price indices and that, in practice, it cannot pursue its anti-inflation efforts in a single-minded manner. The incremental manner in which the Fed changes the discount rate attests to this.

The problem troubling policymakers is that the financial markets react - or, more accurately, overreact - to any statement from someone in the Fed acknowledging concern about the real economy. Perhaps it's harmless to continue playing along with that mild case of paranoia. Nevertheless, I see no benefit from encouraging that silliness by statutory requirement (i.e., Humphrey-Hawkins). After a half century, the flexibility of the Employment Act of 1946 is a continuing testament to the occasional benefits of compromise.