If you pay attention to media coverage of the economy, you’ve probably heard the the goal of full employment has come back into fashion. Along with questions about contemporary politics, the rediscovery of the virtues of tight labor markets raises questions about history. A notable feature of much of the current discourse is its lack of insight into what went wrong with full employment economics the last time. A good example is this New York Times piece from January 18, which informs us:
In the mid-to-late 1960s, Fed officials were tightly focused on chasing full employment. As they tested how far they could push the job market, they did not try to head inflation off as it crept up and saw higher prices as a trade off for lower joblessness. When America took its final steps away from the gold standard and an oil price shock hit in the early 1970s, price gains took off — and it took massive monetary belt-tightening by the Fed and years of serious economic pain to tame them.
There are a number of issues here. First, the absence of the Vietnam War from the account is striking. Any “efforts to push the labor market’s limits in the 1960s” came mostly from the unplanned and deceptively reported stimulus of military escalation. As the figure below shows, the tight labor market is closely associated with the escalation of military spending. Unemployment fell to 4% at the end of 1965 and remained at or below that rate until the 1970 recession. This were also the years of an extremely rapid military buildup. During the next expansion (1971-3) unemployment never fell below 4.6%. In the 1975-80 expansion (not shown), unemployment never fell below 5.6%. Not until late 1999 would the rate fall again to 4%.
The piece also describes “Fed officials [in the mid-to-late 1960s]… tightly focused on chasing full employment.” In fact, the Fed was not the protagonist of the full employment policy. The figure below shows several episodes of monetary restriction intended to offset fiscal expansion, beginning in late 1965. The 1966 tightening brought the financial system to the brink of crisis, and it was concerns about “the maintenance of orderly money market conditions,” rather than unemployment, that led the Fed to ease up. The persistence of inflation led to further moves to tighten in 1968 and 1969, so the Times claim that the Fed in this period “did not try to head inflation off as it crept up” is hard to credit.
The piece only mentions the distributive effects of full employment in a roundabout way. We learn that, recently, “The link between unemployment and wages, and wages and prices, has been more tenuous than in decades past.” It is left to the reader to draw the implication that, in the 1960s and 1970s, low unemployment led to higher wages and higher wages led to higher prices. The word “profit” is completely unmentioned, even though an important channel of wage-related inflation is that businesses facing increased labor costs will (where possible) raise prices to preserve their margins. Also left unspoken are what forces might have led to the change in wage behavior, namely a decades-long assault on organized labor and permanent “job insecurity.” What would happen if workers became better organized and felt more secure? The actual history of the late 1960s helps us imagine an answer, but it remains largely unexplored in the current discussions.
It is understandable that the current discourse, focused on the hopefulness of a new era of full employment policy, avoids these questions. To focus on Vietnam emphasizes America’s historical reliance on military spending to approximate full employment. It also suggests that an explanation of the 1970s stagflation crisis, and an understanding of how it might have been avoided, would need to confront the history of American imperialism. To frankly discuss the effects of full employment on workers’ bargaining power (and therefore on wages, prices, and profits) would raise the possibility that full employment is incompatible with price stability except under conditions of working class weakness. These are institutional and historical questions, which cannot be understood solely through the evolution of Fed doctrine and practices.