[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Today, a slight rise in the unemployment rate brings demands for the government
to do something to “get the economy moving again.” And for good reason: In
today’s economy, when an extra 1 percent of the labor force becomes unemployed,
incomes in the economy fall by about $160 billion. A commitment to maintaining
full employment was absent in the 1930s, or at least there was much less agreement
over whether the government could (as well as whether it should) stimulate the
economy.
GETTING THE COUNTRY MOVING AGAIN
The attempts by government to pursue the goals established by the Employment
Act have helped economists learn about how the economy operates.
The 1960s saw the first active use of government policy to try to reduce overall
unemployment. During the 1960 presidential election, John F. Kennedy narrowly
defeated Richard Nixon in what had been the closest presidential race in U.S. history
until the contest between George W. Bush and Al Gore in 2000. In part, Nixon’s
defeat was due to the slowdown in economic activity and rise in unemployment that
the country experienced in 1959. During the six years from 1958 through 1963, the
unemployment rate averaged almost 6 percent; ten years before it had been 2.8 percent.
Kennedy’s Council of Economic Advisors proposed a policy based on the ideas
of John Maynard Keynes that was designed to stimulate the economy and bring the
unemployment rate down to 4 percent, a level that at the time was believed to be
consistent with “full employment.” The policy called for a major tax cut. Those who
opposed the cut argued that it would be fiscally irresponsible and lead to a deficit,
with the government spending more than it received in taxes. They contended that
inflation would rise and the cost of lower unemployment would be higher inflation.
The government would need to decide how much inflation it was willing to tolerate
to get unemployment down.
In what is perhaps the most famous macroeconomic policy experiment, the federal
government did cut taxes in 1964. At the same time, federal government expenditures
rose because of the Vietnam War and President Lyndon Johnson’s War on
Poverty programs. The unemployment rate did subsequently fall; in fact, it fell below
4 percent, reaching as low as 3.5 percent by 1969. Unfortunately, this fall in unemployment
was accompanied by rising inflation; the general level of prices in the United
States rose by only 1 percent in 1963, but by 1969 prices were rising at an annual
rate of 6.2 percent. To some extent, policymakers at the time thought that higher
inflation was simply the price they had to pay to maintain lower unemployment.
They saw this as a trade-off: lower unemployment required accepting higher inflation,
but inflation could always be reduced again, they believed, by letting average
unemployment return to the levels of the late 1950s and early 1960s.
STAGFLATION
During the 1970s, policymakers discovered that the trade-off between unemployment
and inflation they thought they were facing had somehow disappeared. Instead,
THE COMMITMENT TO FULL EMPLOYMENT AND GROWTH ∂ 477