Monday, February 29, 2016

70 Years of the Council of Economic Advisers

There is no White House Council of Sociology Advisers, or Council of Political Science Advisers, or Council of History Advisers. But since President Harry Truman signed the Employment Act of 1946 into law, for the last 70 years there has been a Council of Economic Advisers. The current CEA takes a look at its own history in Chapter 7 of its just-released 2016 Economic Report of the President.  The chapter includes a dose of detailed history of the CEA, and mini-essays from a number of those who have served as CEA chairs. Here, I'll focus on three themes: What  makes the CEA distinctive as an organization? What are its tasks and some of the big policy choices it has championed? And is it important, in substantial part, for its role as an institutional skeptic?

Here's how the chapter describes the administrative structure and assigned tasks of the CEA:
CEA is in many ways a distinctive institution, both within the administration and in the international context. The CEA chair reports directly to the President on economic issues, but CEA has no regulatory authority and few prescribed operational responsibilities. For most of its history, CEA has had a small staff drawn mostly from the academic economics community and hired on the basis of professional expertise. ...Because CEA has no fixed statutory responsibilities except for assisting in the preparation of the annual Economic Report of the President, its role and influence depend on the degree to which it can be useful and relevant to the President and other senior decision makers. ... Today, CEA’s staff is composed of academic economists and economics graduate students who are on leave from their university positions, career government economists on temporary assignment from other agencies, some recent college graduates who have studied economics, and a small statistical, forecasting, and administrative staff.
Two points here, as I see it, are that the CEA is largely made up of academics who will rotate back into academia, and that the "CEA has no regulatory authority and few prescribed operational responsibilities." As a result, CEA members are arriving from high-level academic jobs outside government and not focused on policy-making. Moreover, CEA members know that they are likely to return fairly soon to academia, where their colleagues will pass judgement (sometimes quietly, sometimes not) over the extent to which they resisted the pressure to become grade-B politicians and instead remained grade-A economists.As the chapter notes says, former CEA chair
"Joseph Stiglitz argues that the fact that CEA is composed of “citizen-bureaucrats” who know they will be returning to their academic perches shortly means that they “have a long-term incentive to maintain [their] professional reputations” (1997), and that this creates an incentive for CEA staff to ensure that its recommendations are economically defensible. ...  CEA’s academic character also helps to bring fresh perspectives on policy into the government, both by bringing in new people who have new ideas, and through keeping open the channels of communication with academia. It also means that CEA’s views about policy tend to reflect economists’ current understanding of how best to promote the public interest."
Thus, even though members of the CEA are chosen and appointed by the White House, and are often either ideologically sympathetic to the president--or at least not oppositional--they are not locked into the same incentives as those who expect to be long-term Washington insiders.

The positions taken by the CEA predictably vary with the president, but what is perhaps more interesting is that the positions tend not to be especially extreme under any president. For example, under both Democrats and Republicans the CEA has been a voice for countercyclical fiscal policy during recessions.The report also notes:
"Under both Republican and Democratic administrations, the Council has argued that reshaping incentives is often a better way of addressing market failures than imposing command-and-control regulation. It has also pushed for policies that promote overall economic efficiency, rather than the well-being of specific sectors, industries, or firms. Charles Schultze notes that “despite some areas of disagreement, a succession of CEAs under both parties has given similar advice on a wide range of microeconomic matters .... [T]the Council’s very first Report rejected both complete laissez-faire and overreliance on fiscal and monetary remedies as approaches to macroeconomic policy, denoting these two positions, respectively, as the “Spartan Doctrine of Laissez Faire” and the “Roman Doctrine of an External Remedy.”
A certain number of CEA tasks also fall into the general category of what I'd call good economic housekeeping, like economic and budget forecasts, doing evaluations of past or proposed policies,, looking at regulations, foreign trade, and other issues. The chapter notes a number of cases in which the CEA played a relatively substantial role:
For example, the Burns Council supported the Federal Aid Highway Act of 1954, which began the present Interstate Highway System. The Heller Council under Presidents Kennedy and Johnson was especially prolific, “helping to shape transportation and trade bills, aiding in the development of the monetary ‘twist’ policy, helping to keep mortgage rates down, [and] developing the rationale of the wage-price guideposts” (Flash 1965). It also helped to develop the idea of the War on Poverty. ... .. Former CEA Chairman Joseph Stiglitz enumerates a number of specific “narrow microeconomic initiatives” in which CEA has played an important role, such as designing tradable permits in pollutants, incorporating risk and discounting into cost-benefit analysis, and introducing auction mechanisms (1997). During negotiations over the Clean Air Act Amendments of 1990, CEA was viewed as the “repository of neutral competence” and was called on to produce unbiased cost estimates of a range of different provisions (Porter 1997)."
The chapter includes a number of other examples. But a list of the issues where the CEA has championed a cause, successfully or not, leaves out an equally important role, which is to help with knocking bad ideas on the head. The fact that the CEA members are chosen by the president, and in some ways politically congruent with the president, is presumably a big help here. Criticism from the CEA can't be dismissed as obstructionist partisanship; instead, it's in-house criticism, friendly criticism from those who are on your side and wish you well. The report quotes former CEA Chairman Ben Bernanke also emphasized this function:
"Economics is a highly sophisticated field of thought that is superb at explaining to policymakers precisely why the choices they made in the past were wrong. About the future, not so much. However, careful economic analysis does have one important benefit, which is that it can help kill ideas that are completely logically inconsistent or wildly at variance with the data. This insight covers at least 90 percent of proposed economic policies." 
Specific examples of proposals that were blocked? The CEA report gives some examples from history:
"For instance, the Heller Council argued against a proposal during the Kennedy Administration to use nuclear explosives to widen the Panama Canal. In the Nixon Administration, CEA played a leading role in the analysis that led to the conclusion that the government should not subsidize the development of a supersonic transport or SST plane, dubbed the “sure-to-be-subsidized transport” (Schultze 1996). Under President Ronald Reagan, CEA participated in a Gold Commission, which investigated the feasibility of returning to the gold standard, and ultimately advised against doing so."
Or former CEA chair Joseph Stiglitz writes:
"But we also did a lot to stop bad ideas and in collaboration with many allies across government, we succeeded in many arenas. We forged an alliance with the Antitrust Division of the Department of Justice to block a proposal to sustain the price of aluminum through the creation of a global aluminum cartel. We helped overcome legislative attempts to change the mandate of the Federal Reserve to focus only on inflation and not on unemployment, and helped defeat a constitutional amendment to require a balanced budget."
When you read a CEA report, there is always a certain admixture of politics, and at some points over the roughly 40 years I've been reading these resorts, the partisanship has been severe enough to make me wince. But it's also true that one can read just about any report looking for ways to discredit it. My own approach is instead to search for nuggets of fact and insight, and over the years, CEA reports have typically offered plenty. Similarly, one can look at shortcomings of the CEA, like a degree of politicization, as a reason that it should be disregarded or even discarded. But that would be an egregious overreaction. The government might benefit from more short-term advisory roles designed for mid-career professionals, who will bring their expertise that cannot be dismissed on partisan grounds for a time--while planning to exit Washington and return to a non-government life.

For those who want more about the CEA, the Journal of Economic Perspectives, where I have labored in the fields as Managing Editor since 1986, published a "Symposium on Fifty Years of the Council of Economic Advisers" in its Summer 1996 issue, 20 years ago. All articles in JEP are freely available, courtesy of the publisher, the American Economic Association. One article was by a head of the CEA under Richard Nixon, another by the head of the CEA under Jimmy Carter, and the final piece by an economic historian about the context of the Employment Act of 1946 that established the CEA. Each of the three articles is cited several times in the 2016 CEA report  The articles were:
Also, this CEA chapter discusses at some length the conflict between CEA’s first chairman, Edwin G. Nourse, and its second, Leon H. Keyserling, The Fall 1997 issue of JEP included an article W. Robert Brazelton about Leon Keyserling, who was involved in the passage of the Employment Act of 1946, was one of the original members of the CEA, and then succeeded Nourse to become the second chairman of the CEA.