The Keynesian Consensus and Its Limits

This chapter argues that a postNew Deal Keynesian consensus shaped U.S. economic policy from 1945 to 1965 based on an evolving rather than static concept of Keynesianism that eventually exceeded the limits of political agreement. With enactment of the Employment Act of 1946, postwar economic policy entered a period of bipartisan consensus over the use of what could be called “compensatory Keynesianism” to limit cyclical fluctuations in the economy.This entailed running compensatory budget deficits during periods of recession (1949, 1953–54, 1957–58) and combating inflation through tight budgets during periods of prosperity.As economic growth slowed, however, new debate arose over the use of fiscal policy to maximize expansion. This became tied into the Cold War debate over how the United States could keep ahead of the Soviet Union in the post–Sputnik era; though more limited than the “compensatory” consensus, pro-growth ideas had attained political ascendancy by 1960.