About the Council of Economic Advisers
From the "Employment Act of 1946":
From The Economic Journal, 102 (September 1992), The Council of Economic Advisers and Economic Advising in the United States, by Martin Feldstein.
The Structure of the Council of Economic Advisers
Although the term 'Council' conjures up the image of a large committee, the CEA actually consists only of a chairman and two members. The chairman is legally responsible for establishing the positions taken by the Council. The other two members direct research activities of the Council in particular fields, represent the Council at meetings with other agencies, and generally work with the chairman to formulate economic advice.
In addition to the chairman and two other members, the CEA has a professional staff that is both small and unusual. A group of about ten economists, generally professors on one- or two-year leaves from their universities, act as the senior staff economists. They in turn are assisted by an additional ten junior staff economists, typically advanced graduate students who also spend only a year or two at the CEA. Four permanent economic statisticians assist the economists in the interpretation and identification of economic data.
The academic nature of the staff and of most CEA members distinguishes the CEA from other government agencies. It generally assures a higher level of technical economic sophistication and of familiarity with current developments in economic thinking. Members and staff also use their strong links in the academic community to obtain advice on technical issues throughout their time in Washington.
There is of course a price to be paid for this reliance on academic economists, especially at the staff level. They often come to the CEA without the institutional knowledge of some of the issues with which they will deal and without any experience in the bureaucratic process of decision-making. My experience however was that most of the senior staff economists learned quite quickly to be effective participants, and made an important contribution to the policy debates because of their ability to apply economic analysis to the issues being discussed, and to develop new economic proposals that had not occurred to non-economist participants from the agencies.
How Advice Is Given
The CEA chairman gives advice directly to the President and to the senior members of the administration. There is also a broader role of trying to shape public understanding of the economic issues. The CEA members and staff participate directly in the inter-agency process, in which policy options are evaluated and recommendations developed for presidential decisions.
The specific organization of advice-giving undoubtedly differs from administration to administration, reflecting the overall form of economic policy making and the particular style and interest of the president. I can only describe my own experience.
In the Reagan administration, the cabinet as a whole rarely met. Instead, economic policy issues were discussed through a series of cabinet councils with more specialized responsibilities. These included a cabinet council on commerce and trade that was chaired by the Secretary of Commerce, a cabinet council that dealt with labour and social insurance issues, a cabinet council that dealt with regulatory and legal issues, and a general cabinet council on economic affairs that was chaired by the Secretary of the Treasury. Each of the interested departments was represented at the council by the secretary of that department. Occasionally the deputy secretary or under-secretary substituted for the secretary at those meetings. I generally represented the CEA, although occasionally one of the members took my place at the table. Vice President Bush usually attended these meetings.
The councils generally met without the president. Roughly twice a month the president participated in council meetings when there was a specific issue that required a presidential decision or, occasionally, a broad area that seemed appropriate for general cabinet-level discussion with the president.
Any major proposal for legislative action, whether originated by a department or from Congress, would be assigned to an appropriate cabinet council for consideration to develop an official administration position. Initial meetings would be held at a staff level, with the CEA represented by the senior staff economist with the relevant expertise. Often discussion at this level would be sufficient to dispose of the idea, usually with the conclusion that the proposal was well-meaning but misguided and would not accomplish its stated purpose or would do so only at an unacceptable economic cost. This would quietly bury an internal departmental proposal or lead to a formal administration position to oppose a Congressional initiative.
When there was disagreement about the proposal that could not be resolved unanimously at the level of this working group, a higher-level meeting would be held. Each interested department would be represented at a sub-cabinet level, generally by an assistant secretary. The CEA would be represented by a member or senior staff economist, since with only two members it was often true that the CEA only had the expertise at the senior staff level and preferred to send a real expert rather than, as in the other departments, to send a more senior official who was 'briefed' but who did not really understand the issues himself.
Once again, if this group could not reach a consensus the issue would be passed up to the full cabinet council, where the departments were represented at the top level and the CEA by the chairman. If this group reached an agreed recommendation, its conclusion would be sent to the President. When there was disagreement, a summary of the different positions would be prepared by the staff of the council for submission to the president for his decision. These decision memos were carefully prepared so that each side could object to any spurious arguments put forward by others. On some occasions, when it was felt that such written summaries were inadequate, the group would meet with the president to present opposing views.
This process gave the CEA an opportunity to influence both the specific decisions and the way that members of the administration thought about particular issues. This was true at every level from the departmental senior staff that interacted with the CEA economists to the cabinet level.
In addition to these relatively large group meetings with the President, there were also smaller meetings dealing with specific subjects. A central organizing set of meetings each year dealt with the budget. Here the only regular participants, in addition to the president and the vice-president, were the Secretary of the Treasury, the Director of the Office of Management and Budget (OMB), the Chairman of the CEA, and a small number of senior White House staff. The series of budget meetings began with a five-year economic forecast prepared by the CEA. Technical staff discussions and meetings between a CEA member, a Treasury assistant secretary and an associate director of the OMB would review the evidence on which a forecast would be based. In insisted, however, that the CEA alone was responsible for the final forecast in order to avoid a repetition of earlier experience in which the forecast was widely (and correctly) criticized as over-optimistic, and therefore as leading to a substantial underestimate to future budget deficits. Needless to say, this was a source of friction and contention.
Other such small meetings with the president included preparation for the G-7 economic summits, for his televised national press conferences, and for discussions of special subjects like social security reform.
The Secretary of the Treasury and I also met roughly every two weeks with the president and a few senior White House staff to discuss subjects of our choice. The Treasury Secretary frequently used these sessions to discuss monetary policy or issues currently under development at the Treasury. I frequently discussed the budget deficit but also talked about things like the character of unemployment, the nature of the trade imbalance, and other types of general 'background' information. These were not intended as decision-making sessions.
In addition to these meetings, I also sent the president brief memos on particular issues. Occasionally these would be my thoughts on some issue being discussed in the administration. There were also almost daily brief memos telling the President how to interpret important economic statistics that would be released the next morning so that he would not be caught unaware of the information (by the press or other visitors) or uninformed about the significance (or lack of significance) of the particular statistic.
The CEA also serves as a source of professional economic advice to other departments and agencies. In some cases, this serves to reinforce the advice being given by that department's own economist. In other cases, it fills a gap where the department does not have an economist or where the CEA can bring better analysis to a particular problem. As chairman I also met on an individual basis with the department heads to discuss policy issues relevant to their department or more general issues like the budget situation.
A weekly breakfast meeting with the Treasury Secretary and the OMB Director -- the so-called Troika or T-t group -- provided an important opportunity to discuss economic issues with complete candour and without fear of leaks to the press. This small group was occasionally joined by Secretary of State George Shultz and on some rare occasions by Federal Reserve Chairman Paul Volcker.
These breakfast meetings were just about the only time during my time at the CEA when the Fed Chairman participated in a discussion inside the administration. He met privately of course with the Secretary of the Treasury and with various financial regulators. I had breakfast with him every other week and on those occasions we discussed the state of the economy, the direction of monetary policy, banking regulation, and such issues as the developing country debt problem, in which the Fed worked closely with the administration.
As the senior economist in the administration, the CEA chairman is frequently called upon to discuss economic policy issues in public. These include testimony to congressional committees, speeches to a wide array of audiences, occasional television interviews and frequent discussions with the press. I always regarded these as opportunities to teach economics. An important challenge was to explain why the dollar had soared and how that, rather than protectionist policies abroad, was responsible for our trade deficit. Until the recovery was firmly established, I would explain why an expansionary fiscal policy was unnecessary and later I spent endless hours explaining how to assess the structural budget deficit and why reducing it was important.
The Council of Economic Advisers produces an annual report which discusses broad issues of economic policy for a general audience. This report is widely read by the economic press, by Congressional staff and by academic economists and students.
How the CEA Advises Presidents
"I think our unique system of placing a professional economist in the White House to report directly to the president works well. I hope that future presidents continue to use this policy."
The principle of comparative advantage suggests that I, as a former chairman of the Council of Economic Advisers, convey my knowledge of this unique and little understood agency. I emphasize the word "unique" because I believe the CEA is really quite different from advisory institutions in other countries.
During my time as chairman (1982 through 1984), I had the opportunity to talk with the senior economic officials in many countries. I never found one that institutionalized our combination of characteristics: a professional economist who has direct access to the head of the government and who participates as an equal in all cabinet-level discussions.
In other countries, the top economic official is either an economics minister (i.e., a politician selected from the parliament who may or may not be a professional economist) or a professional economist who reports to the minister of finance or some other cabinet minister. There are also some special situations in which individual economists are influential advisers to the heads of government, but these are personal arrangements that have not been institutionalized in the way that the CEA has been.
One reason why the American system for giving economic advice differs from those abroad is that, in our presidential system, it is the president rather than the minister of finance or budget minister who has ultimate responsibility for all economic matters. In other countries, the prime minister or president is less involved with economic issues and the responsible cabinet member has a political standing and legitimacy in his own right. In the United States, the cabinet is in the last analysis an advisory and management body while all true decision-making authority of the executive branch is vested in the president.
The role of the CEA and its chairman undoubtedly differs over time depending on both the chairman and the president. The differences can be quite profound even within the same set of legal rules. For example, during the Nixon administration there was a period when George Schultz served simultaneously as budget director and as counselor to the president with responsibility for overall coordination of economic advice. But I have not researched the history of the CEA and will therefore focus my comments on the period of 1982-1984 that I know from firsthand experience.
I began by saying that the council is "little understood" because I have frequently discovered that people are quite surprised when they learn how small the council is and how it actually operates. The term "council" seems to conjure up the image of a dozen or more people sitting around a conference table voting on recommendations of economic policy. In fact, the CEA has only a chairman and two additional members.
Since the days of the Arthur Burns' chairmanship in the Eisenhower administration, there has been an official executive order vesting all of the executive authority for the council in the chairman. In practice, that means that the three members have informal discussions but do not take votes. It also means that when a formal recommendation from several agencies is sent to the president, the position taken by the CEA reflects the judgment of the chairman just as the position of the Treasury reflects the view of the Treasury secretary. In giving direct advice to the president, i always spoke for myself rather than on behalf of the Council.
The CEA has a small but high quality professional staff of about twenty economists and four economist statisticians. The statisticians are permanent civil servants who understand the construction of official economic statistics and do their best to save the economists from erroneous use of these data. Because the senior staff economists come fro universities for a one- or two-year period, they keep the CEA up to date on the best academic thinking on a wide range of subjects.
Although the CEA is physically as well as operationally part of the White House complex (CEA offices are in the Old Executive Office Building adjacent to the White House and within the same security cordon), the economic staff functions in a completely professional and nonpartisan way. My very able and distinguished staff included Larry Summers, who was prominent as chief economic adviser to presidential candidate Michael Dukakis.
The tradition of professionalist is so strong that even in a presidential election year the CEA chairman appoints members of the staff for the coming academic year with the clear understanding that they will continue to serve even if the party in power loses the presidential election. I might just add in this context that, unlike the practice in some countries, the members of the CEA and their staff work full-time at their CEA responsibilities. Indeed, in December and January of each year, the pressure of working simultaneously on the Economic Report of the President, the budget, and the issues to be presented in the president's state of the union message seemed like much more than a full-time job.
The CEA was created by the Employment Act of 1946 with a Keynesian heritage and an expectation that it would give advice about the use of fiscal policy to achieve and maintain full employment. Needless to say, there has been a profound change in the economics profession's thinking about macroeconomic policy in the past forty years.
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