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1/ In October 1978 was enacted the Humphrey-Hawkins bill that constitutes an important piece of legislation for the dual mandate of the FED. Follows a summary of my working paper on the economists’ influence in the writing of the bill (here is the paper: https://bit.ly/33Pl1Fo )
2/ While signing the HH bill, President Carter put inflation and unemployment on an equal footing: “I must warn you that our fight against inflation must succeed if we are to attain our unemployment goals”.
3/ Indeed, the bill required the government to reach a 4% rate of unemployment and a 3% rate of inflation as soon as 1983. However, originally the bill should only address full-employment. But the battle in Congress led to add the numerical inflation target.
4/ I argue in the article that the economists within or close to Carter Administration (and often close to the Brookings Institute) were unintentionally instrumental to put inflation and unemployment on an equal footing in the bill.
5/ A modern narrative says the Phillips Curve (Inflation/Unemployment negative correlation) led in the 1960s/1970s to run inflationary policies. @james_forder has debunked this “myth”. I show that in the HH case the PC was rather an argument to limit the fight against unemployment
6/ Warning: This use of the PC was not at all the consequence of Friedman 1968. Many economists warned the public against the inflationary risks of the HH bill, without invoking the natural rate of unemployment and the impossibility of a long-run trade-off.
7/ Let’s come back to the origins of the bill. As @pkandelic has explained, the first version of the bill was the result of an association between two different movements.
8/ Augustus Hawkins was the first Black politician elected to the House in a Western state (in 1962 in California). He was the principal author of Title VII of the 1964 Civil Rights Act, which outlawed employment discrimination based on race, religion, sex, or national origin.
9/ With a team of experts, Hawkins wrote a first bill in 1972 to constrain the government to guarantee “a job for everyone who wanted to work and was able to work”. The bill targeted people counted outside of the labor force. A conference was organized in UCLA to discuss the bill
10/ Introducing the conference, Hawkins attacked the difference in unemployment rates between Black and White Americans, but also the quantification of unemployment itself.
11/ But some macroeconomists invited to discuss the bill (Alan Sweezy/California Institute of Technology & Charles Holt/Urban Institute) invoked the Phillips Curve & the level of structural unemployment to highlight the inflationary risks of a too ambitious goal for unemployment.
12/ Bertram Gross, who had contributed to the writing of the first versions of the 1946 Employment Act as to the writing of the Hawkins bill, raised against this use of the PC, as it relied on inappropriate measure of unemployment.
13/ That was the 1st example of this conflict around the Phillips Curve that would appear time and again in the following years in the debates around the HH bill.
14/ This first movement defending the employment of African-Americans was then joined by a second movement involved in the defence of economic planning, gathered notably around Wassily Leontief & Robert V. Roosa, former Treasury secretary under Kennedy.
15/ The planning approach was motivated by the US current economic situation and the consequences of bad harvests and energy shortages. It saw (Keynesian) fiscal and monetary policies as insufficient alone to fulfill national goals and considered a broader approach necessary.
16/ The initiative defended the creation of an Office of Economic Planning in the White House and a congressional Joint Planning Committee (mimicking the Joint Economic Planning, JEC, established by the 1946 Employment Act).
17/ Hubert Humphrey, Senator of Minnesota (1959-1964; 1971-1978) & former Vice President of Johnson endorsed the proposed legislation. The JEC, with Humphrey as Chair, would become a platform to defend economic planning and full employment. See Andelic, 2019, on Humphrey:
18/ The two movements eventually joined their forces and the Humphrey-Hawkins bill was introduced in Congress in March 1976. They notably shared a common rejection of standard Keynesian policies.
19/ Best example of this rejection was Leon Keyserling who would become the most active supporter of the bill. Keyserling was involved in many legislations of the New Deal and would later become the second CEA chairperson. See Pickens’ biography of Keyserling:
20/ Keyserling lack of a PhD made him suspicious and critical of academic economists’ contributions to public policy. Bernstein, 2001, A Perilous Progress, p.113:
21/ In the 1960s, his main target became the Cambridge economists of the “New Economics”, who populated the CEA and Kennedy’s tax cuts. Pickens, 2009, 189-190:
22/ Keyserling profile was characteristic of the economists supporting HH: few academic credentials but a strong and long experience in contributing to policymaking since the New Deal. They would enter into conflict with the more “academic” economists around Carter.
23/ As soon as the Democrat primary campaign, Carter’s team publicly claimed some reluctance to adopt the bill.
24/ Lawrence Klein, future Bank of Sweden Nobel-Prize winner & chair of Carter’s economic task force declared to the Time: “This bill could become an albatross, but no bill goes through Congress without amendments and I can envision 10 amendments that would make this a good bill”
25/ Having tried (unsuccessfully) to delete the numerical target for unemployment and added (successfully) a non-numerical commitment to price stability, Carter eventually integrated the bill in his program for the Presidential Election.
26/ After Carter’s election, Klein refused to become the new CEA chair, and Charles Schultze, former director of Kennedy’s Bureau of Budget and member of the Brookings economic panel, was appointed.
27/ Some months earlier, he has testified before Congress about a former version of the HH bill and argued against the inflationary risks of the bill, relying on the Phillips curve analysis:
28/ Carter’s administration tried to delay the introduction of the law in Congress but Humphrey, Hawkins & Keyserling decided to pressure the government in June 1977. The Carter Library archives in Atlanta allowed me to follow the negotiations between the two camps
29/ Two major points of contention were the existence of a trade-off between inflation and unemployment, and the level of the numerical target on unemployment.
30/ Keyserling kept arguing publicly against the existence of the trade-off that he considered as “unjust and immoral” as well as wrong empirically:
31/ But Schultze stuck to a formulation that would allow some flexibility in the bill, in case inflation rose. He clearly put inflation and unemployment on an equal footing.
32/ The CEA also tried to estimate the impact of a numerical target by surveying estimations of the NAIRU in the academic literature. A clear conclusion was that 4% seemed a too low target to avoid the rise of inflation.
33/ Even if political reasons and personal preferences were also involved, economic expertise pushed Carter’s Administration to reject the 4% overall rate of unemployment as a feasible target for 1982 or 1983.
34/ However, removing or raising the target was unacceptable for HH, and, for political reasons, Carter eventually accepted the target (but the Administration got some flexibility in the formulation of the bill regarding the trade-off).
35/ Outside of Carter’s economic experts, many economists, while not rejecting the bill totally, adhered to the Phillips curve framework & expressed their fear of the inflationary risks in congressional hearings (in 1976 for the 1st version & in 1978). See for instance Bob Hall:
36/ The hardest hit against HH bill in these hearings was the report of the then young Congressional Budget Office. CBO’s head, Alice Rivlin, presented a report supporting the trade-off view and the inflationary character of the bill:
37/ The trade-off argument was also retrieved by Think Tanks and Business Organizations. The Business Roundtable or the US Chamber of Commerce invoked it in hearings.
38/ However, the academic economists who displayed the most vehement opposition to the bill did not rely on the trade-off. They opposed general & non-technical arguments against government interventionism and the abilities of economic expertise. See for instance Greenspan:
39/ Other free-markets advocates like William Allen, James Buchanan, or Armen Alchian raised similar concerns during the hearings.
40/ However, to oppose the bill in Congress, the Republican Party used a different line of argumentation. They notably defended an amendment integrating a numerical target for inflation, to equilibrate the bill.
41/ Interestingly, no economists publicly supported the integration of such a target. As for the HH supporters and Carter Administration, they joined forces to dismiss the amendment.
42/ Senator Proxmire who submitted the amendment that would be eventually integrated defended the numerical inflation target by invoking the existence of a trade-off between inflation and unemployment:
43/ He also referred to George Perry, “an eminent economist” and “no automatic knee-jerk reactionary” (he was a fervent opponent to monetarism) who had just raised concerns in the New York Times about the recent wage inflation following the recent drop in unemployment
44/ Despite the lack of direct support from economists to the amendment, it eventually passed because the Democratic Party wanted to avoid a filibuster that would delay the enactment of the bill.
45/ The final version of the bill voted in Congress in October 1978 was thus very different from the original version (and emptied of its substance for many). Whereas it had been elaborated to fight unemployment, it eventually put unemployment and inflation on an equal footing.
46/ By adhering to the Phillips curve analysis, a majority of economists, who supported to a certain extent the bill and rejected a numerical inflation target, favored the idea that none of the two variables should have the priority on the other.
47/ It made it easier to weaken the bill by integrating the inflation target, and Carter did not hesitate to discard the HH act when the oil shock of the late 1970s increased the pressure to fight inflation and let unemployment to increase.
48/48 End: comments, criticisms, questions on the article are more than welcome!
And a link working correctly (my apologies...) to download the paper: https://agoutsmedt.wordpress.com/research/
