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Council of Economic Advisors

COUNCIL OF ECONOMIC ADVISORS

COUNCIL OF ECONOMIC ADVISORS. Congress established the Council of Economic Advisors to the President (CEA) as part of the Employment Act of 1946, which committed the federal government to maintaining "maximum employment, production, and purchasing power" in the economy. The creation of the CEA was meant to bring the science of economics to bear on the political process of making policy. It also reflected both the increased responsibility that the federal government assumed for the health of the economy during the depression and World War II (1939–1945) and the increasing administrative capacities of the executive branch, a trend that began during the Progressive Era but accelerated during the 1930s and 1940s.

The CEA consists of three members, each of whom the president nominates and the Senate confirms. From 1946 to the 2000s all but three CEA members have had academic experience, and from 1953 to the 2000s all have been economists. Commensurate with the CEA's advisory, rather than operational, role, Congress provided for a small professional staff, which has numbered between fifteen and twenty-five, expecting the CEA to draw on statistical and data collection services available elsewhere in the executive branch or from consultants for its information needs. There has been high turnover among CEA members and staff, often coinciding with changes in administration.

Though Congress did not specify its exact role, the CEA soon emerged as a body that was responsible for providing the president with practical and relevant economic advice. The Employment Act charged it with the production of an economic report for delivery to the Joint Economic Committee in the Congress, which the 1946 act created. The president, at his discretion, adds his comments to the report, which constitutes his economic policy statement. The committee holds hearings and reports its findings and recommendations to Congress as a whole. CEA members, however, have become active in national and intragovernmental debates on a number of topics, including productivity, capital formation, and industrial competitiveness. Thus, from its inception as an advisory group that was concerned with macroeconomic issues, the CEA has become increasingly involved in microeconomic issues and has functioned as a source of economic advice, broadly conceived. Reflecting the position of the economics profession generally, there has been much greater agreement among CEA members regarding microeconomic issues than macroeconomic ones.

Together with the Treasury Department and the Office of Management and Budget (OMB), the CEA has responsibility for advising the president on fiscal policy. The heads of these agencies form a group known as the Troika, which analyzes economic conditions and makes recommendations. Historically, the secretary of the Treasury heads the group. The prestige and influence of the CEA peaked during the 1960s. During the 1980s and 1990s, Treasury, OMB, and other officials have increased their influence relative to the CEA.

The effectiveness of the CEA has been a function of the president's desire to consult it. President Harry S. Truman did not see the CEA as a useful source of information and policy advice. His successor, Dwight D. Eisenhower, however, relied heavily on the CEA for the formulation of domestic economic policy. Indeed, Eisenhower reorganized the CEA, elevating the chairman to its operating chief. Under chairmen Arthur F. Burns (1953–1956) and Raymond J. Saulnier (1956–1961), the CEA emerged as a respected and integral contributor to policy making within the executive branch. Under Walter Heller (1961–1964), the CEA established its credibility in a number of economic fields by providing analyses and arguments that the president and other officials found to be convincing. By the 1980s, the CEA was performing five functions for the president, in addition its initial brief of preparing the annual economic report of the president. These were: forecasting economic conditions; educating the president on the capacity of economic thinking to inform policy-making; vetting departmental and agency proposals within the executive branch for their consistency with presidential policies; advocating the president's policies before Congress, interest groups, and the public; and defending presidential policies on technical grounds.

Because Presidents John F. Kennedy and Lyndon B. Johnson relied heavily on the CEA to guide their decisions, economists had unprecedented influence over economic policy making during the 1960s. Both presidents routinely referred cabinet secretaries and the heads of other agencies to the CEA to vet their policy proposals, even when the expertise of the latter did not extend to the field of policy under discussion. Thus, for instance, Johnson asked Wilbur Cohen, his secretary of health, education, and welfare, if he had reviewed the Medicare bill with the CEA. In contrast to the economic advisors of the Eisenhower administration, the CEA during the 1960s strongly recommended economic growth over stability, even if it meant sacrificing the balanced budgets cherished by President Eisenhower and his advisors. The CEA, adhering to "domesticated" Keynesianism—as Herbert Stein, CEA chairman from 1972 to 1974, phrased it—persuaded President Kennedy of the need for an income tax cut to enable real economic output to reach its potential, which supposedly held the key to reducing unemployment. When inflation became a concern after 1965, as a high employment economy became an overheated one, the CEA advised President Johnson on the need for an income tax surcharge to pay for federal government spending associated with the Great Society and the Vietnam War. The CEA also took on the role of policy advocate, engaging business and labor leaders directly in the interest of controlling wages and prices on a voluntary basis. Through adopting an adversarial role, however, the CEA suffered some diminishment of its reputation. Moreover, this direct engagement with business distracted the CEA's attention away from the macroeconomic sources of rising prices.

The relative influence of the CEA on policy development fell during the Richard M. Nixon administration. The Troika, for instance, operated through a liaison in the White House, rather than directly through the president. Further, reorganization of the White House in July 1970 shifted the primacy of domestic economic policy away from the CEA, toward the Treasury Department. The role of the CEA chairman as the chief spokesperson for the administration likewise diminished, as the Treasury secretary played the leading role in communicating policy to Congress and the nation. The CEA continued to participate in the most important committees that had responsibility for making policy, and CEA members continued to analyze key economic issues. However, presidents after Nixon on did not relyon the CEA for policy development to the extent that Kennedy and Johnson did. Under President Ronald Reagan, the reputation of the CEA declined, as Reagan's first two CEA chairmen resigned. Both Murray Weidenbaum (1981–1982) and Martin Feldstein (1982–1984) differed with other top officials on the administration's supply-side approach to economic policy. During the George H. W. Bush administration, the influence of the CEA declined further, in relation to other advisors, who were closer to the president personally.

The academic economists that comprised most of the appointees to the CEA recognized that their usefulness depended on their ability to provide politically relevant and realistic advice. While the CEA might attempt to educate the president on the need to take a course of action, its advice has ultimately had to comport with the course that the president and his closest advisors have charted. CEA recommendations therefore have reflected political realities as much as, or more than, economic theories. During the 1970s, for instance, inflation emerged as a major domestic policy concern. As part of its response, the Nixon administration adopted mandatory wage and price controls, which proved to be no more than a politically acceptable panacea. At the same time, Alan Green-span, who served as CEA chairman from 1974 to 1977, was an ardent advocate of both limited government and market-based policy solutions. He was critical of intervention in the form of progressive income taxes, corporate subsidies, antitrust and consumer protection laws, and so forth. He therefore rejected wage and price controls as a solution to inflation and believed that restrictive monetary policy and balanced budgets held the key to containing inflation. With the Federal Reserve in control of the former, Greenspan initially focused on budget cutting to achieve the latter. With the economy in recession during the second half of 1974, however, Greenspan conceded the need for a tax cut in the face of pressure from Congress, even though it assured that a large budget deficit would occur and promised to aggravate inflation. Greenspan made this concession even though he opposed addressing long-term economic problems with short-term fixes that introduced uncertainty into policy making, which tended to diminish capital formation and other economic activities on the part the private sector.

The CEA, of course, is not infallible. Its faulty pre-diction of a recession in 1962, for instance, raised questions among members of Congress regarding the quality of the advice that President Kennedy was receiving from his experts. In another instance, the CEA backed the Treasury Department in refusing to sanction expansion-ary fiscal policy during 1959 when the economy showed signs of slipping back into recession. In not advocating a full employment policy, the CEA's decision contributed to the economy falling back into recession during 1960. At this time, the CEA was concerned above all with controlling inflation, as was the rest of the Eisenhower administration. On the whole, however, the CEA's record of advising the president has ensured that its members have played an important, if not decisive, role in the making of economic policy.

At the same time, the participation of professional economists in the policy making process has politicized the social science of economics. The public and members of Congress tend to view the positions that CEA economists adopt as partisan ones. Since the media have privileged CEA economic points of view above others, the CEA has served to link economic argument to the agendas of political parties. Indeed, the record of CEA appointments around the turn of the twenty-first century has suggested that presidents explicitly value policy orientation over professional reputation as the decisive selection criteria. The impossibility of separating politics and economics in practice means, of course, that the goal of the creators of the Employment Act of 1946—that economists inform policy making in a nonpartisan manner—cannot be realized ideally.

BIBLIOGRAPHY

Flash, Edward S., Jr. Economic Advice and Presidential Leadership: The Council of Economic Advisers. New York: Columbia University Press, 1965.

Frendreis, John P., and Raymond Tatalovich. The Modern Presidency and Economic Policy. Itasca, Ill.: F. E. Peacock, 1994.

Hargrove, Erwin C., and Samuel A. Morley, eds. The President and the Council of Economic Advisers: Interviews with CEA Chairmen. Boulder, Colo.: Westview, 1984.

Norton, Hugh S. The Employment Act and the Council of Economic Advisers, 1946–1976. Columbia: University of South Carolina Press, 1977.

Stein, Herbert. The Fiscal Revolution in America. Chicago: University of Chicago Press, 1969.

———. Presidential Economics: The Making of Economic Policy from Roosevelt to Clinton. 3d. rev. ed. Washington, D.C.: American Enterprise Institute for Public Policy Research, 1994.

———. "The Fiscal Revolution in America, Part II: 1964– 1994." In Funding the American State, 1941–1995: The Rise and Fall of the Era of Easy Finance. Edited by W. Elliot Brownlee. Washington, D.C.: Woodrow Wilson Center Press and New York: Cambridge University Press, 1996. See pp. 184–286.

Michael R.Adamson

See alsoEconomics ; Employment Act of 1946 ; Office of Management and Budget ; Treasury, Department of the .

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