The cost of business cycles and the benefits of stabilization

During the past half century, policymakers in the U.S. have consistently sought to chart a stable course for economic growth. The importance accorded to this goal does not merely owe to the views of select policymakers, but is mandated by law. In 1946, Congress passed the Employment Act, which encouraged the federal government to adopt policies that would lead to maximum employment and price stability. Evidently dissatisfied with the fulfillment of these goals, some 30 years later Congress passed the Full Employment and Balanced Growth Act in 1978 (also known as the Humphrey–Hawkins Act after its two coauthors), which strengthened the original Employment Act. Among other things, the 1978 law mandated that the Federal Reserve should specifically aim to maintain economic growth in line with the economy’s potential to expand. That is, policymakers were instructed to steer the economy in such a way as to ensure steady output growth, fast enough to maintain full employment but not so fast as to ignite inflation.