The Employment Act of 1946 was a pivotal change in US economic policy. For the first time, the federal government took legal responsibility for maintaining maximum economic growth, high employment and consistent purchasing power through the use of macroeconomic policy. A standard interpretation of the Act is that World War II went a long way toward gaining acceptance in the USA for the ideas of John Maynard Keynes (1883â1946) and the Act originally aimed at a conversion to Keynesian economics by the federal government through the use of fiscal policy. The conversion was not completed, the story goes on, because conservative politicians in Congress changed a full-employment bill into an Act promising high employment. Still, the Act has been considered to have brought about the application of Keynesian ideas as the basis for macroeconomic policy in the USA during the post-World War II period.1
The story behind the Employment Act is more complex, however. In this book, I will describe another facet of the Employment Act and its implementation. The idea of a living wage was also part of the background leading up to the Employment Act. Moreover, the Act mandated that the president prepare a detailed annual Economic Report on the state of the economy and what to do to improve it, making the Report, in the words of Alvin Hansen (1887â1975), âthe most important economic document of our times.â2 Hansen, as will be described in later chapters, was an early advocate of Keynesian economics and based the importance of the Report on its indication of the US governmentâs fiscal policies. Equally important, I will argue, the idea of a living wage was an essential issue in those Economic Reports of the President for over two decades.
The general point I will be making is that the process through which Keynesian economics became a part of macroeconomic policy can best be designated as hybridization. In the USA, before Keynes wrote The General Theory of Employment, Interest and Money, macroeconomic policy consisted of a dual approach of using a living wage to increase consumption with higher wages and pre-Keynesian fiscal policy to create jobs and higher levels of consumption through public works projects.3 The goal of both approaches was to redistribute income to workers in a quest for greater equality.
After Keynesâ ideas became known to them, politicians and economists who employed this dual macroeconomic policy took from Keynes the ideas that fit in with their pre-existing framework, especially his approach for judging what the government had to spend to reach full employment, and ignored the rest. This point has parallels with Alan Blinderâs recent book where he argues, âEconomists offer lots of policy advice, most of which politicians routinely rejectâ because they have different goals.4 In my case, this process resulted in what I will call a hybrid system of redistributive economics that ultimately rested on the attainment of a living wage for low-skilled workers from the push of labor reform and the pull of demand management. Before looking at that hybrid system, I will first consider the use of a living wage as a macroeconomic policy.
Macroeconomic Policy and a Living Wage
The incorporation of the idea of a living wage into the background and outcome of the macroeconomic policies engendered by the Employment Act may seem unusual, because a living wage is usually justified on the grounds of social justice. As I have argued previously, however, a living wage had been an element of the macroeconomic policy of the New Deal.5 Starting in the early years of the twentieth century, as I will describe in Chap. 2, advocates for a living wage developed a formula for securing their goal: collective bargaining, social insurance and a minimum wage equaled a living wage. I call this formula the political economy of a living wage.6 Under it, collective bargaining through unions would enable workers to negotiate a living wage; minimum wage legislation would help workers who were not unionized earn a living wage; and government-mandated social insurance would offer unemployment compensation and pensions to provide workers with a living wage when they were unable to work.
This formula for a living wage reinforced the labor and social reforms of the New Deal of Franklin D. Roosevelt (1882â1945), as I will describe more fully in Chap. 2. First, Rooseveltâs administration tried a collaborative approach to economic planning through the National Industrial Recovery Act (NIRA) as administered by the National Recovery Administration (NRA). In addition to promoting the formation of business cartels, the NIRA had a goal of a living wage from the use of collective bargaining and a minimum wage as put in place by the codes the NIRA required for each industry. When it was declared unconstitutional in 1935 by the US Supreme Court, Roosevelt shifted gears and sought a living wage through regulatory reformâthe National Labor Relations Act (NLRA) for collective bargaining (1935), the Social Security Act (SSA) for unemployment insurance and pensions (1935) and the Fair Labor Standards Act (FLSA) for a minimum wage (1938).7
This book continues my previous study of the history of the reforms brought about by the political economy of a living wage8 by considering their relationship with the Keynesian economic theory usually thought of as the major component of the Employment Act. From a review of the Economic Reports of the President mandated by the Employment Act, I will argue that in the USA, macroeconomic policy from Trumanâs Fair Deal through Johnsonâs Great Society bundled the political economy of a living wage with Keynesian economics to produce the hybrid system of redistributive economics. Those Reports used a Keynesian analysis of the economic state of the nation to determine fiscal policy; they also proposed improvements in collective bargaining, social insurance and the minimum wage as policies to meet the goals of the Employment Act. The result was a hybrid system of redistributive economics where wages could be pushed upward by the reforms of the political economy of a living wage and pulled upward by fiscal policy.
In their historical study of inequality and growth in the USA, Peter H. Lindert and Jeffrey G. Williamson outline six forces that can affect income inequality and politics is one of them. Their research indicates that there was a reduction of income inequality in the USA from 1910 to 1970 with top incomes growing slower than the incomes of the rest of the population and with greater income equality among the rest of the population as wage levels of low-skilled workers increased compared to higher-skilled and white-collar workers. They explain part of this reduced inequality as due to Progressive politics with its social spending on items such as pensions and unemployment insurance and non-spending policies such as collective bargaining.9 In the same way, Robert J. Gordon credits two of the New Deal programs, the NLRA and the FLSA, for bringing about this reduction in inequality.10
Elliot Rosen, on the other hand, argues that the NLRA and the FLSA âwere counterproductive from a macroec...