Tuesday, February 16, 2016

CEA History

The Council of Economic Advisers has released a history of the CEA on its' 70th anniversary, as  Chapter 7 of the  Economic Report of the President. This piece is very interesting for economists interested in policy.

It's a nice reminder on how much economic policy ideas have changed. In the late 1940s, when the CEA was set up, fiscal policy was everything. Solow's growth model had not been invented, let alone Romer's. Monetary policy was a twinkle in Milton Friedman's eye. Adam Smith had more or less been forgotten. Economic policy was widely thought to consist of just setting the right level of fiscal stimulus, let multipliers work their magic, to achieve "full employment" and economic growth. The piece tracks well the rediscovery of microeconomics and regulation, as well as the shifts in macroeconomic thinking.

It reminds us how much the stage has changed. In the early years there were really no economists working elsewhere in government, and there were no think tanks. Now every agency has a chief economist and a staff, and the CEA isn't (!) the only game in town for producing policy-oriented research. Its role has changed as a consequence.

The CEA has long had many roles,  adviser, calculator of numbers, cheerleader for the Administration's policies, spinner for the Sunday talk shows, and interagency warrior.

One of its most important and least appreciated roles is just to stop silly stuff.

Joe Stiglitz:
 the money saved from just one of the many bad projects the CEA had helped stop ... would have been enough to provide us with a permanent endowment
Ben Bernanke, even better:
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.
Some examples
...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. 
In my brief time at CEA while very young I got to see this role up close.  There would be an interagency meeting on something like tariffs and quotas for goose down. Every other agency would show up at a meeting all for it -- defense wants to make sure there are American suppliers of American goose down from patriotic American Geese, so our boys fighting the Russkies in Canada someday will stay warm. The American Goose Down production board is screaming about unfair dumping from China. The Goose Feather Plucker's union is all for it, along with the merchant marine -- under the Jones Act, American geese must travel on American made and staffed ships. State is all for it too, so long as we can carve an exception for special down from Berlin. The Congressional liaison says the Congressman from the one county in the country that makes goose down is screaming about it and will cause all sorts of trouble if we don't do it. And so on and so forth. It was the CEAs lonely role to stick up for the poor consumer who might want a cheap warm jacket. (Note: I'm mostly making all this up as a composite of a large number of different cases.)

There has always been a tension, how much the CEA is there to provide disinterested advice, and how much it is there to cheerlead the Administration's policies, though many of those are at least limited by political considerations, if not downright driven entirely by politics.  Just how much time should the chair spend on Sunday talk shows spinning the latest numbers to show how great the Administration's policies are?
As many commentators and former CEA chairs have observed, there can be a tension between CEA’s duty to advance the President’s agenda and its responsibility to provide expert economic advice. 
Important: You can't be pure and also effective:
CEA chairs and members need to be able to operate effectively within a political environment without it affecting the integrity of their economic advice. 
The Chapter offers good advice, coming from long experience:
Former CEA chairs, members, and staff offer several specific pieces of advice as to how to successfully strike this balance: they advise that CEA should not publicly advocate for policies that are not supported by economic analysis, and that CEA should stick to giving economic advice, not political advice. CEA’s comparative advantage is economics, 
A former chair told me a great story of offering a president political advice, only to be told "you stick to the economics, and let me do the politics."

A big lesson is not to become an administrative agency:
Others advise that the Council should not get too involved in policy coordination. ... One episode that illustrates this lesson occurred during the Johnson Administration, when CEA was responsible for the day-to-day administration of wage-price guideposts to combat inflation.
Stuart Eizenstat, President Carter’s domestic policy adviser, argues that “[t]he CEA cannot provide both detached, Olympian economic advice and become enmeshed in the daily, inter-agency compromises and political log-rolling” (1992).
In 1993, President Clinton created a National Economic Council inside the White House. It seemed to me a sort of parallel CEA. Governments often don't cancel an agency, they just create a new parallel one, and let the old one rot. The report handles this question carefully, but seems to suggest that the arrangement is working, with the NEC allowing the CEA to do less political work and better economic work:
Since 1993, the National Economic Council has been responsible for coordinating economic policymaking. These arrangements have largely served to augment CEA’s effectiveness by permitting it to focus on providing economic advice and analysis and giving the Council greater exposure to the President
The CEA is, rather unabashedly, the representative of the economics profession in the government. The chapter covers it well.
The final function of CEA is to engage with the economics community, by staying abreast of the latest academic research and by sharing new insights with policymakers, and in turn, by communicating the administration’s actions and plans to the economics community. This function helps to support the administration’s efforts to develop economic policies and to articulate and advance the President’s agenda. While the academic character of CEA may not have been originally intended by Congress when it created CEA, this engagement has arguably made the Council a more effective and durable institution.
I'm a little leery of this paragraph. I think the distance from research to policy might productively be a little greater -- let's make sure the latest research is solid first. And the vision that the CEA is there to sell a political agenda to economists is a bit frightening.

But inaugurated by the CEA, there has been a much more active participation by academic economists in policy making. I think policy is better for it -- or at least not as catastrophically bad as it might be otherwise -- and so is academia.  Academics are also taking over from bankers and politicians at the Fed, with positive impact in my view.  Marty Feldstein's box speaks to this issue nicely.

A nice summary:
Many of CEA’s contributions are due to its unique institutional structure: that it is a small organization with no regulatory authority of its own, few direct operational responsibilities, and populated by academic economists. Yet its contributions are also dependent on the ability of its staff to balance operating effectively in a necessarily political environment without being overly influenced by politics, and to be effective in advocating for their positions while providing objective economic advice. All in all, given the divergent objectives reflected in the Employment Act of 1946, CEA’s turbulent early years, and its unusual institutional structure, CEA has proven to be a durable and effective advocate for the public interest.
A small personal note: I got the lucky chance to be a junior staff economist -- basically an RA -- while I was in graduate school. It was a great experience. I worked on a new project every two weeks, largely under Bill Poole. Unlike my academic training, we quickly went from idea, to data, to report or memo and on to the next. Bill taught me a lot. I saw quite a bit of how policy is made. I learned that most of the people in Washington are really smart, hard working, informed, and public spirited. It cured a lot of cynicism.  And it got me to work on much better ideas for my research, to break out of the literature-driven world 3d year graduate students live in, and to make sure my research ideas matter to the larger world.

If you get the chance, go.

An don't worry about politics. At the staff level, it's pretty a-political. In fact, working for an administration whose general philosophy you disagree with would be good for you. (See Martin Feldstein's little essay on this point. Quite a few of the Reagan-era staff were democrats.)

Update: "On February 11, the Hutchins Center on Fiscal and Monetary Policy at Brookings marked this anniversary by examining the ways the CEA and other economists succeed and fail when they set out to advise elected politicians and tap the expertise of some of the “exceptionally qualified” economists who have chaired the Council over the past four decades."

Video and other links here.  And here is their photo from the event, with many past CEA chairs and economists.

Source: Brookings institution. 


  1. I learned that most of the people in Washington are really smart, hard working, informed, and public spirited. It cured a lot of cynicism.

    I did a year in DC in a different area and had the same conclusion. Motivated reasoning is an issue, but all of your adjectives generally apply.

  2. As someone who used to have a nearly complete set of the Economic Report of the Presidents (going back to the 1940s!) , I enjoyed this post (in the pre-internet days, the numerical tables were great).

    Yes, the old reports seem simple. And yet, in 1965 the US real GDP expanded by 8.48%.

    The US economy real GDP has not expanded by more than 3% in 10 years.

    So who know what they were doing?

  3. From the link:

    "By the early 1980s, the focus on macroeconomic stabilization policy had shifted to the Federal Reserve, and the economics profession had come to see a smaller role for discretionary countercyclical fiscal policy."

    Did the CEA lose sight of the big picture?


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