The economy is always among the top concerns of Americans. The national economy is complex and sometimes unpredictable, but often responsive to federal actions such as government spending, taxes, tariffs, interest rates and government subsidies to various business sectors. (For more, see When The Federal Reserve Intervenes (And Why).)
TUTORIAL: Economic Indicators: Overview
Since the end of World War II in 1945, the U.S. economy has become increasingly more interconnected to the economies of other nations as global markets emerged and international trade expanded. Domestic factors, nevertheless, have always been the principle influence on the U.S. economy. These include government and consumer spending, the gross domestic product (GDP), interest rates on U.S. debt, personal and corporate income taxes and many more. (For more, see The Importance Of Inflation And GDP.)
Because our government's chief executive officer, the President of the United States, may not possess the expertise required to manage the national economy, an advisory agency of government, the President's Council of Economic Advisers (CEA), was established by law in 1946 under the administration of Harry S. Truman. The function of this agency, part of the Executive Office of the President, is to advise the President on domestic and international economic policy. (For related reading, see How Influential Economists Changed Our History.)
The article below will trace the history of the Council, describe its functions and some of its most important decisions, and assess its efficacy and value to the nation.
A Brief History of the President's Council of Economic Advisers
Recognizing the need for expert advice in formulating economic policy, Congress enacted legislation establishing the CEA as part of the Employment Act of 1946.
As originally established, the CEA was composed of three presidential appointees, including a chairman, subject to Senate approval.
According to the statute, each appointee should be a person trained and educated in economics. They must be qualified to analyze, appraise and interpret economic data and government programs, as well as formulate and recommend national economic policy. CEA advice is also designed to promote employment, production, and purchasing power "... under free competitive enterprise."
Drawing upon data and analysis provided by the CEA, the President prepares an annual Economic Report. (For related reading, see The Difference Between Finance And Economics.)
To support its advice, the CEA accumulates current, comprehensive and reliable economic data. Although CEA advice may be authoritative, neither the President nor Congress are obligated under law to implement its recommendations.
The Scope of Recommendations
The economic impact of CEA recommendations can be far reaching, rippling through the domestic and global economy. These may include recommendations for new legislation, setting interest rate policy, export and import policies as well as suggested cuts or increases in government spending. These recommended changes in spending levels can be general or on specific budget items such as defense,
The Business Cycle and Growth
Among initiatives recommended by the CEA in the early years of its history was the abandonment of the cyclical model of the U.S. economy in favor of a growth model.
Under the business cycle model, GDP expands and contracts with minimal government intervention in the economy. But with strategic government spending, easing of taxation and specific interest rate policies, a growth trend can be established so that downturns in the cycle can be made shorter and growth trends sustained for longer periods. Periods of unemployment and reduced consumer spending can therefore be shortened and the economy will be less damaged and people less affected during the downturns. (For related reading, see Market Cycles: The Key To Maximum Returns.)
Guns and Butter
During the height of the Cold War era of the 1950s and 1960s, when the United States and the Soviet Union were antagonists on the brink of war, the principal economic issue was defense spending and budget deficits. Increased government spending on defense was thought to compromise the U.S. standard of living, an issue referred to as the guns or butter dilemma. Many economists theorized that the U.S. could have one or the other, but not both. Chairmen of the CEA, however, argued that the U.S. economy was strong enough to support both substantial defense spending and a high standard of living, and proposed methods of achieving both goals.
Structure, Composition and Functions of the CEA
The CEA reportedly employs 27 people in addition to the three principle council members. Personnel includes senior economists, staff economists, research assistants and a staff of statisticians and administrative employees.
There is also an internship program for graduate and full-time undergraduate college students. Interns assist in researching both macroeconomic and microeconomic activity and help in the analysis of the resulting data.
Members of the Congressional Joint Economic Committee are kept up to date on economic data, GDP, employment numbers, business activity, the consumer price index, interest rates and credit, security markets and domestic and international economic statistics by a monthly CEA publication called "Economic Indicators." The Committee, composed of members of the Senate and House of Representatives, is charged with the promotion of maximum employment, production and consumer purchasing power. (For related reading, see Why The Consumer Price Index Is Controversial.)
Monthly reports of economic data and analysis are posted on the CEA blog, accessible to the public at: www.whitehouse.gov/administration/eop/cea/
Included among the many distinguished Chairmen of the CEA since its founding are Alan Greenspan, Ben S. Bernanke and Arthur F. Burns, all of whom later served as Chairman of the Federal Reserve Bank. (For related reading, see Ben Bernanke: Background And Philosophy.)
The Bottom Line
Depending on one's point of view, the CEA at various times in its decades-long history has either been an invaluable source of economic wisdom and practical advice for the President, or a misguided impediment to the free enterprise system. A more even-handed consensus, however, regards the CEA as a necessary element of government in an economy of ever-increasing complexity and global interdependence. (For related reading, check out Adam Smith: The Father Of Economics.)