The Employment Act of 1946: still working after 50 years

by Murray L. Weidenbaum

The legislation created the Council of Economic Advisers to provide information to the president. Since the council is not encumbered by special-interest baggage, it serves as a proxy for the public interest.

The first half-century of experience under the Employment Act of 1946 (originally the Full Employment Bill of 1945) likely has disappointed both the proponents and opponents of that innovative law. The impact on national economic policy neither is as bad as the opposition feared nor as substantial as the sponsors had hoped.

Viewed in the most fundamental light, however, the legislation has been successful. The two institutions the 1946 act established remain in operation and the act's then-controversial statement of policy has become accepted as part of the Federal government's bureaucratic fabric. A substantial government responsibility for the over-all performance of the American economy now is widely assumed. In fact, politicians of the opposition party readily hold the administration in office accountable for whatever economic short comings occur.

Of the two organizations established by the 1946 act--the Joint Economic Committee and the Council of Economic Advisers--the CEA has tended to be the more visible and perhaps more influential, but has traversed a very rocky path.

Formally, the CEA has little power. It is a very modest-sized constituent unit of the Executive Office of the President, dwarfed in number of employees and budget by the Office of Management and Budget, National Security Council, and U.S. Trade Representative Office. The council's only statutory functions are to give the president economic advice, though he is under no compulsion to follow it. In 1961, the CEA defined its role: "The Council has a responsibility to explain to the Congress and to the public the general economic strategy of the President's program, especially as it relates to the objectives of the Employment Act.... It is not appropriate or necessary for the Council to go into the details of legislative proposals or of Administrative actions which fall primarily in the domain of operating Executive departments or agencies...."

The influence of the CEA has ebbed and flowed. Soon after leaving the CEA, Edwin Nourse, its first chairman, wrote that "the actual position of the council has undergone such progressive attrition or debasement that it bids fair soon to be negligible." Yet, a golden age arguably was reached in the early 1960s during the chairmanship of Walter Heller in the Kennedy Administration-- a time when the council preached the gospel of the new economics.

To a degree, the success of the Heller council has bedeviled its successors. By demonstrating the important role that could be played by economists at the highest levels of government, its achievements encouraged the various Cabinet departments to upgrade existing economics staffs and set up new positions of undersecretary or assistant secretary for economics. Enhanced employment opportunities for economists are an attractive prospect. In this case, however, that meant a new form of competition for the CEA in presenting its views in the inner councils of the government. It also made possible a cacophony of administration economists, at times confusing the public as to where the administration stood on a given issue.

The recent past provided another period of uncertainty as to the future of the CEA. In 1995, the House of Representatives refused to pass the appropriation for the CEA. The council continued to operate on the basis of temporary funding, though, and a regular appropriation eventually passed. The new chairman, Stanford University economist Joseph Stiglitz, seems to be taking a low public profile, although not quite as self-effacing as Arthur Burns did during the Eisenhower Administration. It is interesting to note that, when the CEA's future was being debated in 1995, every active Republican ax-chairman came to the defense of the CEA as well as the Democrats who served on the council.

The universal feeling in the profession is that the council plays a unique and important role. Of course, it is the profession's key window into Washington. Far more important, the CEA is a source of professional advice to the president from a group that has little, if any, special-interest baggage; thus, it can serve as a proxy for the public interest. The CEA does more than provide up-to-date statistics--it examines controversial issues of public policy from the viewpoint of the president, rather than a specialized department.

To some extent, it is a tribute to the power of mainstream economic analysis to note that, on a great many issues, the work of Democratic and Republican councils is interchangeable. With few exceptions, the CEA can be counted on to present serious arguments against subsidies (whether to business, labor, or agriculture), restrictions on foreign trade, outmoded regulation of industry, and inefficient social regulation that fails to pass a benefit-cost test.

Posing difficult problems of choice to a president constantly bombarded with easy answers surely is a challenging assignment. The late Arthur Okun, a former CEA chairman, noted that economists can coexist with politicians in the same manner that lambs coexist with lions-you need a large supply of lambs.

The other institution set up by the Employment Act of 1946 is located in the Legislative Branch and originally was called the Joint Committee on the Economic Report. True to its name, it held hearings on the president's economic report and issued its findings. It has no authority to vote on legislation.

The committee gradually expanded its purview to hold hearings and commission studies on a wide variety of economic matters. After a while, the current title--the Joint Economic Committee (JEC)--was adopted to reflect its broader range of activities. Indeed, some of the hearings, reports, and compendia issued by the committee have been influential in generating public and Congressional support for reforms in a variety of areas--monetary and fiscal policy, international economics. defense procurement, taxation, and budget matters.

Although never nonpartisan, the JEC, in its earlier years, tended to focus on specific issues of economic policy that transcended party positions. While continuing its tradition of sponsoring professional economic analysis, the activities of the committee in recent years seem to reflect more fully the party in power in the Congressional branch that selects the chairman (which is rotated between the Senate and the House of Representatives).

A special development may have led to this situation. The establishment of separate committees on the budget in each house resulted in a new forum where economic policies can be debated and in a committee that has the power to report out the important budget resolutions. Thus, the new budget committees have become a powerful competitor to the JEC as a place where key legislators and senior government officials can debate the major issues of economic policy. Nevertheless, the Joint Economic Committee remains the only institution in the Congress that focuses its interests on economics--and one of the few where both houses interact regularly.

When enacted, the Employment Act declared that "it is the continuing policy and responsibility of the Federal Government to use all practical means consistent with ... other essential considerations of national policy ... to coordinate and utilize all its plans, functions, and resources ... to promote maximum employment, production, and purchasing power."

The debates of the 1960s and 1970s on the relative effectiveness of monetary and fiscal policy changed the basic focus of U.S. economic policy. The Federal Reserve Bank now is looked to as the primary mechanism for achieving short-term economic stability, while tax and budget policies are viewed in terms of the longer-run impacts on investment, economic growth, and income distribution.

In an informal, but universal, reinterpretation, the reference in the Employment Act to "purchasing power" has been cited as the basis for government concerning itself with controlling inflation. Subsequently, the Humphrey-Hawkins Act of 1978 formally added the goal of eliminating inflation. The original primary emphasis on "maximum employment"--which was a legislative compromise to break the deadlock over the more controversial term "full employment"--generally has taken a back seat in Federal economic priorities. Perhaps this is a compliment to the flexible language of the legislation. More basically, the new emphasis may reflect changing national priorities resulting from the country's success in avoiding the massive unemployment of the 1930s and earlier periods.