All Terrain Thinking

A Compendium of things I think are Important

Economics: It's not just whats' in your wallet

The 1960s

"The Congress hereby declares that it is the continuing policy and responsibility of the Federal Government to . . . promote maximum employment, production and purchasing power."

"Economics has come of age in the 1960s.... The paralyzing grip of economic myth and false fears on policy has been loosened, perhaps even broken.  We at last accept in fact what was accepted in law 20 years ago in the Employment Act of 1946, namely, that the federal government has an overarching responsibility for the nation's economic stability and growth.  And we have at last unleashed fiscal and monetary policy for the aggressive pursuit of those objectives."

Questions of the Day

Overview: The Setting

Outline

The end of the business cycle?

• Detailed treatment of aggregate demand
• Building in inflation (and unemployment)
• Building in timing
• Economic forecasting

Abstract

The Full Employment Act of 1945, an excerpt from which appears in the first quote above, appeared to be a victory for Keynesians who quickly established their dominance after WW II, but Keynesian economics did not actually influence macro policy until the 1960s.  In the presidential campaign of 1960, John F. Kennedy brought the state of the economy back to center stage and won the election with a campaign pledge to "get the country moving again."  This victory could have been expected, according to De Long, because the lingering memories of the Depression made "it is reasonably clear that, sooner or later, the turning of the political wheel would bring a left-of-center party to effective power in the United States.  And when that happened everything - the memory of the Great Depression, the elements of that party's core political coalition, the theories of economists in the mainstream profession - would push for policies of significant expansion."₁  

This was the decade where the anti-depression economics of Keynes was repackaged as anti-recession economics and policy makers experimented with "fine-tuning" the macroeconomy.  By mid decade few seemed to think Walter Heller was exaggerating when he said "economics has come of age."  There was every reason to believe we were entering what  Heilbroner's "Golden Age of Capitalism,  and by the end of the decade we would be reading obituaries of the business cycle.  Arthur Okun, president Johnson's economic advisor, was so confident in the successes of the revolution that he claimed recessions "are now generally considered fundamentally preventable, like airplane crashes and hurricanes." The key experiments in the decade were the Kennedy tax cut and the Johnson tax surcharge - one which worked, and one which didn't - and the key economic concept was the Phillips Curve.  It was a decade of significant "refinements" of the model of aggregate demand and timing questions appeared; where inflation begin to creep into the picture; and where economic forecasting became big business.   These will be the topics covered in this unit.  

₁. Brad Delong America's Only peacetime inflation: The 1970s p 14. 

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