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Council of Economic Advisers
Robert Stanley Herren, North Dakota State University
"The Council of Economic Advisers was established by the Employment Act of 1946 to provide the President with objective economic analysis and advice on the development and implementation of a wide range of domestic and international economic policy issues" (Economic Report of the President 2001: 257). Although it has been the most enduring and important result of the Employment Act of 1946, the Council of Economic Advisers (CEA) was not the legislation's major focus. As the Second World War ended, many feared that the United States would return to being a depressed economy. Many felt that the United States had the ability, through discretionary fiscal policy, to prevent such an economic collapse but needed legislation to force the federal government to promote continued economic prosperity. Thus, Keynesian economists in government convinced their congressional allies to introduce the Full Employment Act of 1945. Because critics thought the proposed legislation would result in higher inflation, the final legislation (Employment Act of 1946) included vague goals of "maximum production and employment consistent with price stability."
Neither Congress nor President Truman possessed a clear vision concerning the purpose of the three-member Council of Economic Advisers (CEA). President Truman complicated the CEA's early years by appointing three people (Edwin Nourse, chair; Leon Keyserling, vice-chair; and John D. Clark) who held disparate views concerning the CEA's purpose and economic policies. Nourse preferred the CEA to provide impartial economic advice to the President and to avoid the political process; for example, he did not believe that it was appropriate for CEA members to participate in Congressional hearings. Keyserling, who came to Washington during the 1930s to work in President Franklin Roosevelt's administration, wanted to participate in the political process by being a forceful advocate of the President's economic program. The squabbling continued until Nourse resigned, and Keyserling became the CEA's second chair in 1949.
During the first months of the Eisenhower administration, there was substantial debate about whether the three-member form of the CEA should be continued. Critics of Truman's CEA noted that it did not always speak with a unified voice; more damaging was the belief that Keyserling had become a Democratic partisan in his vigorous defense of presidential initiatives. President Eisenhower wanted to maintain the CEA in some form because he appreciated receiving expert advice from his staff. He chose Arthur Burns to chair his first CEA and to reorganize the CEA. Burns kept three members but eliminated the vice-chair position to make it clear that the chair controlled the CEA; this structure still exists.
The three-member Council of Economic Advisers has continually provided professional economic advice to presidents, who have appointed to the CEA many prominent mainstream economists including several recipients of the Nobel Prize in economics. Its staff has remained small with between 25 and 30 people including senior staff economists (usually on leave from universities), junior staff economists (most often graduate students), and several permanent statisticians. Writing its annual Economic Report provides a CEA with the opportunity to explain the economic rationale for an administration's economic programs.
Advocacy of Economic Growth
Each Council of Economic Advisers has stressed the importance of adopting policies to ensure a high rate of economic growth. CEAs have been advocates within administrations for emphasizing economic growth as a national priority. CEAs have been most successful in promoting economic growth by consistently supporting microeconomic policies to promote competition and to make markets work better. Because they contend that free international trade improves a nation's economic growth, CEAs have supported presidential efforts to enact policies that would result in more open trade among nations. Former CEA members have often noted that much of their and the staff's time dealt with microeconomic policies, often to provide arguments against ill-conceived proposals coming from other parts of the administration or from Congress. Clinton's CEA described well this function: "The Council's mission within the Executive Office of the President is unique: it serves as a tenacious advocate for policies that facilitate the workings of the market and that emphasize the importance of incentives, efficiency, productivity, and long-term growth. ...The Council has also been important in helping to weed out proposals that are ill-advised or unworkable, proposals that cannot be supported by the existing economic data, and proposals that could have damaging consequences for the economy" (Economic Report of the President 1996:11).
Although CEAs in both Democratic and Republican administrations have given similar advice regarding microeconomic and international trade policies, they have not agreed on how to use fiscal policy to increase the growth of potential real output. Republican CEAs, particularly in the Reagan and Bush administrations, have recommended lower marginal tax rates to increase work effort, saving, and investment. Democratic CEAs have generally thought that such effects are small. For example, Clinton's CEA vigorously defended the increase in marginal tax rates imposed by the Omnibus Budget Reconciliation Act of 1993. It argued, similar to other Democratic CEAs, that an increase in marginal tax rates would not adversely affect economic growth because it would not significantly reduce work effort, saving, and investment.
Fiscal Policies and Business Cycles
The Employment Act of 1946 focused on using discretionary fiscal policy to prevent another Great Depression. CEAs have contributed to convincing presidents during recessions not to raise tax rates or to reduce government expenditures in an attempt to balance the budget. This effort started early in the CEA's history with the recessions of 1948-1949 and 1953-1954 because both Truman's CEA and Eisenhower's CEA accepted the idea that budgets should be balanced over the business cycle, rather than annually.
Although it was easy to avoid using contractionary fiscal policy during an economic downturn, it was more difficult to know when to advocate expansionary fiscal policy. For example, many have criticized the Eisenhower administration for not moving more aggressively in using fiscal policy to stimulate aggregate demand between 1958 and 1960. Eisenhower's CEA, however, never found an appropriate time to recommend a tax cut. It perceived the economy to be too strong in 1958 to warrant additional demand. It saw the economic slowdown in 1959 to be caused by a supply disturbance (a lengthy steel strike) rather than a lack of aggregate demand. The fear in 1960 was any potential tax legislation, enacted during a presidential election year, would contain too many provisions that would adversely affect long-term economic growth.
The CEA's most famous success in using discretionary fiscal policy occurred during the 1960s. President Kennedy appointed Walter Heller as his first chair. Heller, joined by Kermit Gordon and James Tobin, formed the most Keynesian CEA ever. They thought that unemployment could be reduced from the current level of seven percent to four percent without increasing inflation. In its 1962 report, the CEA explicitly set four percent unemployment as the interim target for the full-employment rate of unemployment. Heller's excellent rapport with President Kennedy allowed the CEA to successfully promote the investment tax credit (1962) and reduction of marginal tax rates for personal income (1964); the latter legislation was primarily designed to increase consumer demand.
However even this success demonstrated the extensive time period required to enact fiscal policy. Later in the 1960s during President Johnson's administration, aggregate demand increased faster than expected due to increasing government spending arising from both military expenditures in Vietnam and the creation of many new government programs. To prevent inflation the CEA recommended a tax increase. President Johnson did not immediately accept this advice; he ultimately proposed and obtained a tax surcharge (1968) that was too little and too late to prevent rising inflation.
Over time, there has been a growing realization that the political process reduces the opportunities for timely enactment of discretionary fiscal policies. Moreover a long and variable effectiveness (impact) lag combined with uncertainty in the magnitude of fiscal policy multipliers further weaken the case for discretionary fiscal policy in reducing cyclical fluctuations. Instead, CEAs have stressed the importance of strengthening the automatic stabilizing aspects of the fiscal system.
While fiscal policy has declined in importance as a countercyclical tool, monetary policy has become relatively more important. The CEA does not directly influence monetary policy, but it does regularly communicate with the Federal Reserve in an attempt to provide it with the CEA's view of the economy. It is uniquely qualified to explain the economic consequences of monetary policy to the President and White House staff.
Most CEAs have publicly supported the concept of an independent Federal Reserve; the most notable exception was Truman's CEA, which under chair Leon Keyserling opposed the 1951 Treasury-Federal Reserve Accord. Although later they were often frustrated by the Federal Reserve's monetary policy, particularly when CEAs preferred a more expansionary policy, CEAs vigorously attempted to prevent administrations from excessive criticism of the Federal Reserve's monetary policy. CEAs viewed such "Fed-bashing" as counterproductive for several reasons. The Federal Reserve vigorously protects the appearance of its independence; it does not want to appear to be caving into congressional or presidential pressure. Moreover since the early 1980s, the CEA has not wanted to undermine the Federal Reserve's credibility of successfully restraining inflation because CEAs believe that the Federal Reserve can best promote economic growth by keeping inflation low and stable.
Although since 1980 CEAs have agreed that monetary policy is the primary long-run determinant of inflation, earlier CEAs held a variety of views concerning methods to prevent inflation. Truman's CEA contended that a lack of supply in specific sectors, rather than excess aggregate demand, was the underlying cause of inflation; it recommended selective price and wage controls rather than contractionary monetary policy to reduce inflation.
A perceived problem during the 1950s and 1960s was that administered prices and cost-push inflation caused inflation to rise before the economy could reach full employment. Eisenhower's CEA used a policy of exhortation, appealing for voluntary restraint with business and labor sharing responsibility for obtaining price stability. Kennedy-Johnson CEAs formulated wage-price guideposts that provided a quantitative aspect for its exhortation; these guideposts crumbled when aggregate demand grew too fast.
President Nixon's CEA faced the challenge of devising a policy to reduce inflation without causing a major recession. The CEA recommended using monetary and fiscal policy to gradually reduce the growth of aggregate demand. However, inflation did not slow even though the nation went through a recession. The slow fall in inflation resulted in the Nixon administration formulating the "New Economic Policy" in August 1971, which suspended convertibility of the dollar into gold and instituted a temporary comprehensive freeze on wages and prices. Nixon's CEA, which initially opposed imposition of mandatory wage and price controls, would spend much of the next three years helping to provide an orderly transition from the freeze. Subsequent CEAs, with exception of Carter's CEA, did not consider wage-price policies to be a viable tool in preventing inflation.
During the 1960s, the Kennedy-Johnson CEAs believed that the relationship between inflation and unemployment (the Phillips curve) was relatively flat at unemployment rates greater than four percent; lower unemployment rates were associated with higher rates of inflation. Since 1969, CEAs with the exception of Carter's CEA have used a natural rate theory of inflation. The natural rate theory indicates that there is not a permanent tradeoff between inflation and unemployment; instead the economy tends to move toward a given level of unemployment often termed the natural rate of unemployment or full-employment rate of unemployment. Nixon and Ford CEAs both thought that the natural rate of unemployment had risen since the early 1960s, but for political reasons the CEA was reluctant to abandon the 4 percent target established in 1962. Finally in 1977, it wrote that the full-employment unemployment rate had risen to at least 4.9 percent due to demographic shifts; other factors may have raised it to 5.5 percent. Between 1981 and 1996, the CEA generally thought the natural rate of unemployment was about 6 percent. During the latter half of the 1990s, it reduced its estimate because unemployment fell without inflation increasing. Both the last report written by Clinton's CEA (2001) and the most recent report written by Bush's CEA (2004) consider the natural rate of unemployment to be currently about 5 percent.
Evolving Role and Influence
The CEA have been most influential in affecting economic policy when its chair has been able to develop an excellent rapport with the President; examples include Walter Heller with President Kennedy and Alan Greenspan with President Ford. CEAs have rarely disagreed with the President or his staff in public even though they have lost many battles. Often they do not even mention policies, with which they disagree, in their annual reports. If the disagreements are serious enough, members have preferred to quietly resign. A notable exception occurred when Martin Feldstein's public feuding with White House staff concerning budgetary policy in 1983 and 1984 reduced the CEA's influence; in 1984 Reagan's White House staff considered terminating the CEA.
Over time more departments and agencies have hired professional economists, thereby eroding the "monopoly" of economic expertise once held by the CEA in the White House and executive branch. Moreover, each administration adopts a different organization for its decision making and flow of information; these organizational differences may affect the CEA's impact on the formulation of economic policies. For example, President Clinton established a National Economic Council (NEC) to coordinate economic policies within his administration. Laura Tyson, Clinton's first CEA chair, resigned to become director of the NEC; some interpreted this move as indicating the latter position was more influential in affecting economic policy. President Bush continued the NEC.
The CEA retains influence with its chief constituent - the President - because it does not represent a specific sector or department. It can focus on providing economic advice to promote the use of incentives to obtain economic efficiency and economic growth.
The CEA's annual reports documents changes in thinking in "mainstream economics."
Presidential libraries contain many files from the CEA and its individual members. Many former members have written articles and books reflecting about their experiences. There has been much written about the ideas and politics involved in making specific economic policies. The works listed below constitute just a small part of a vast literature; I have chosen the literature that I have found to be most useful in understanding the role of the Council of Economic Advisers in advising the President about economic policies.
Bailey, Stephen. Congress Makes a Law: The Story Behind the Employment Act of 1946. New York: Columbia University Press, 1950. Bailey's work remains the definitive study regarding the legislative debates that resulted in the Employment Act of 1946.
DeLong, J. Bradford. "Keynesianism, Pennsylvania Avenue Style: Some Economic Consequences of the Employment Act of 1946." Journal of Economic Perspectives 10, no. 3 (1996): 41-53. DeLong places the CEA's ideas and influence within a broader context of the profession's changing views concerning economic stabilization.
Feldstein, Martin. "American Economic Policy in the 1980s: A Personal View." In American Economic Policy in the 1980s, edited by Martin Feldstein, 1-79. Chicago: University of Chicago Press, 1994. Feldstein was CEA chair (1982-1984); he often clashed with other White House staff members.
Goodwin, Craufurd, editor. Exhortation and Controls: The Search for a Wage-Price Policy, 1945-1971. Washington: Brookings Institution, 1975. The authors of the essays extensively used documents in presidential libraries and interviews with many economists who participated in developing wage-price policies.
Hargrove, Edwin C. and Samuel A. Morley, editors. The President and the Council of Economic Advisers: Interviews with CEA Chairmen. Boulder: Westview Press, 1984. The editors interviewed nine of the first ten CEA chairs (Edwin Nourse had already died). In addition to the interviews, the editors included an introductory essay that summarized the major themes of the interviews.
Herren, Robert Stanley. "The Council of Economic Advisers' View of the Full-Employment Unemployment Rate: 1962-1998." Journal of Economics 24, no. 2 (1998): 49-62. This article discusses how various CEAs have viewed the "maximum employment" provision of the 1946 Employment Act.
Orszag, Jonathan M., Peter R. Orszag, and Laura D. Tyson. "The Process of Economic Policy-Making during the Clinton Administration." In American Economic Policy in the 1990s, edited by Jeffrey Frankel and Peter Orszag, 983-1027. Cambridge, MA: MIT Press, 2002. Tyson was CEA chair (1993-1995). The authors briefly discuss attempts to coordinate economic policy prior to the Clinton administration. The authors emphasize activities of the National Economic Council and its interactions with the CEA.
Porter, Roger. "The Council of Economic Advisers." In Executive Leadership in Anglo-American Systems, edited by Colin Campbell and Margaret Jane Wyszomirzki, 171-193. Pittsburgh, PA: University of Pittsburgh Press, 1991. Porter provides a brief history of the evolving role and functions of the CEA.
Saulnier, Raymond. Constructive Years: The U.S. Economy under Eisenhower. Lanham, MD: University Press of America, 1991. Saulnier was CEA member (1955-1956) and chair (1956-1961). He provides his views about the economic ideas of Eisenhower's CEA.
Schultze, Charles L. "The CEA: An Inside Voice for Mainstream Economics." Journal of Economic Perspectives 10, no. 3 (1996): 23-39. Schultze was CEA chair (1977-1981).
Sobel, Robert and Bernard S. Katz, editors. Biographical Directory of the Council of Economic Advisers. New York: Greenwood Press, 1988. The essays emphasize the economic ideas and careers of the forty-five economists who served in the CEA from 1947 to 1985.
Stein, Herbert. Presidential Economics: The Making of Economic Policy from Roosevelt to Clinton. Third revised edition. Washington: American Enterprise Institute for Public Policy Research, 1994. Stein was CEA member (1969-1971) and chair (1972-1974). He focuses on the general context, including the advice of CEAs, in which Presidents formulated economic policies.
Stiglitz, Joseph E. The Roaring Nineties: A New History of the World's Most Prosperous Decade. New York: W.W. Norton, 2003. Stiglitz was CEA member (1993-1995) and chair (1995-1997). He provides substantial information concerning the ideas that affected economic policy during President Clinton's administration.
United States, President. The Economic Report of the President. Washington: United States Government Printing Office, 1947-2004. The reports since 1995 have been available on-line at http://www.gpoaccess.gov/eop. The most recent report, and other general information about the CEA, can be found at http://www.whitehouse.gov/cea/
Citation: Herren, Robert. "Council of Economic Advisers". EH.Net Encyclopedia, edited by Robert Whaples. August 18, 2004. URL http://eh.net/encyclopedia/article/Herren.cea