The New Republic

In mid-February the White House Council of Economic Advisers (CEA)
put out one of the several documents it generates each year. Under
the headline "PRESIDENT BUSH'S 2001 TAX RELIEF SOFTENS THE
RECESSION," the two-page report argued that without last year's tax
cut, the economy would have shrunk much faster than it actually
did. The study went on to make a few pro forma comments about
"[increasing] the incentives for saving," and "reducing an
important impediment to ... the overall accumulation of wealth,"
before noting that the tax cut would continue to work its magic in
the coming months. "[B]y the end of 2002," the report concluded,
"the President's tax relief will have helped the private sector to
create 800,000 more jobs."On its face, this was nothing out of the ordinary.
Economists--particularly those employed in Washington--run these
estimates as a matter of routine. But there was something curious
about the CEA report: Nowhere did it contain so much as a hint as
to the study's methodology--no statistical appendix, no footnotes
about assumptions, not even a phone number you might call to
request that information. In fact, the closer you looked, the less
"economic" the report appeared. Logical contradictions stuck out
like a sixth finger, among them the suggestion that the tax cut,
which by definition dramatically decreased national saving (i.e.,
the surplus), was at the same time increasing saving. And some of
the language sounded oddly political, like the suggestion, right
out of a George W. Bush stump speech, that the tax cut had
"strengthened families." As William Gale, a senior fellow at the
Brookings Institution who served on CEA in the first Bush
administration, recalls, "[T]he report ... was basically an
assertion, not an analysis. If there was an analysis, it was
nowhere to be seen."

A cynic might ask why anyone should be surprised. After all, CEA
serves the president and as such its priorities and research agenda
are set by the White House. "Life in the political world is
different from academia," concedes Harvard economist Jeffrey
Frankel, who was a member of the Clinton CEA and worked on the
staff of the Reagan CEA. And yet, for most of its 56-year history,
CEA has been notable for the lack of politics in its work. The
Council is composed almost entirely of academic economists, on one-
or two-year leave from universities, whose sole mission is to
provide the president with objective economic advice. While
bureaucracies like the Treasury, Commerce, and Labor Departments
employ highly competent economists of their own, CEA is "the only
group of economists in the government that doesn't have some agency
ax to grind, " as Nixon CEA Chairman Herb Stein famously quipped.

As a result, CEA economists are widely viewed in economic policy
circles as scrupulously nonpartisan. In a 1992 article excerpted on
the CEA website, former Reagan CEA Chairman Martin Feldstein wrote
that "[t]he tradition of professionalis[m] 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." And over the years CEA
officials have been fiercely protective of their independence.
Though a pro-business conservative himself, Feldstein quickly found
himself out of favor with the Reagan White House for advocating
deficit reduction and publicly supporting the Fed's tight monetary
policy. Feldstein reportedly so infuriated Reagan Treasury
Secretary Don Regan that Regan instructed members of Congress to
"throw away" CEA's annual economic report.

All of which is to say that if the Bush administration were using
its CEA to put an academic imprimatur on political decisions of
questionable economic merit, it would be very big news indeed.
Former Jimmy Carter CEA Chairman Charles Schultze once succinctly
described CEA's mission as pushing decisions "as far as possible in
the direction of sanity." If CEA is no longer pushing, there may be
few limits on how far in the direction of insanity this
administration will go.

For years CEA was pretty much the only game in town for serious
economic analysis. But starting in the 1970s economists began
cropping up in all corners of government. In response, recent
presidents have tended to rely on a single entity to collect all
the economic advice being offered. In the first Bush
administration, this entity was called the Economic Policy Council
(EPC), and was essentially managed from the Treasury Department.
But having run on campaign themes like, "It's the economy, stupid,"
Bill Clinton needed a higherprofile body, and so he moved the EPC
into the White House and renamed it the National Economic Council
(NEC). All of a sudden CEA had a rival--and an intensely political
one--in its own backyard. For much of the Clinton administration
that rivalry never materialized. According to White House lore,
Clinton CEA Chair Laura Tyson recognized the potential for conflict
early on and worked out an informal arrangement with Robert Rubin,
the first NEC head, to defuse it. "There was agreement about the
relative size and relative makeup, and the difference in mission,"
Tyson says. As former Eisenhower aide Bradley Patterson explained
it in his book The White House Staff, Tyson sought "to maintain
CEA's long-standing reputation as the purveyor of hard, factual
economic data-- gathered, analyzed, and distributed without any
bending to political considerations or the need for `spin.'"

Remarkably, that arrangement more or less held up even after Tyson
and Rubin left their respective positions. And because it did, CEA
remained largely apolitical. That's not to say its arguments always
held sway. Janet Yellen, Clinton's third CEA chair, recounts a
discussion with NEC over a graph in the president's 1998 annual
economic report that noted an alarming number of personal
bankruptcies despite otherwise solid economic news. Yellen
ultimately removed it after asking herself, "Is this really
important? Does it really matter? ... We're not adding something
untrue, but removing something marginal. " But more often CEA stood
its ground. For example, the Council convinced the Clintonites to
adopt a market-based approach to key elements of the Kyoto
Protocol. And it helped limit the president's protectionism on
steel. Yellen recalls, "I told President Clinton protecting steel
would cost about eight hundred thousand dollars per year per job
... [and] he's probably thinking, `Give me a break; I've got unions
and senators and congressman from steel states breathing down my
neck.'" In the end, though, the economists largely prevailed. "He
didn't do nothing, but not nearly as much as Bush," says Yellen.

It wasn't long after the inauguration of George W., however, that
the divide between the politicos at NEC and the economists at CEA
broke down altogether. While the campaign's top economic adviser,
Lawrence Lindsey, was quickly installed as NEC director and
assistant to the president for economic policy, CEA lacked a
chairman for more than a month. So Lindsey began filling the void.
"Lindsey came and started to tell us he'd like to work with CEA
really closely, that he would like us to start a weekly memo to
him," says one former staff member.

This posed a big problem. After all, not only was Lindsey in a
political job, but he was the primary author of Bush's tax cut and
had earned a reputation as something of an ideologue. "We started
to feel like, `Hey, he's acting like he's our boss. Gee, this
doesn't feel right.' No one knew what to do about that, " adds the
staffer.

In the meantime, rumors swirled. Some feared the White House was
planning to consolidate NEC and CEA. "After [Lindsey] became head
of NEC, we were concerned about him having joint custody.
Justifiably," recalls another economist. Others heard--and the
press reported--that the administration was having difficulty
finding a CEA chair because Lindsey's prominence within the
administration would inevitably mean taking a back seat. And
Lindsey did little to deflect these suspicions. At an early meeting
with the CEA staff, for example, he allegedly referred to himself
as the "de facto CEA chair." (Lindsey confirms through a spokesman
that he convened the meeting but doesn't remember using the
phrase.) One former CEA economist was so concerned she "got in touch
with John Taylor [rumored to be a candidate for the CEA
chairmanship] and he gave me a little pep talk.... He said, `Yes,
it's right for you to worry about working with [Lindsey].'"

In many ways Lindsey was more a symptom of the problem than its
underlying cause. From the beginning of his presidency, Clinton
essentially cast his lot with Wall Street, betting that if he
reined in the deficit, bond traders would reward him with lower
long-term interest rates. In other words, Clinton's entire economic
strategy hinged on winning credibility in the financial world,
which made it vital that respected, mainstream economists play a
prominent role in his administration. Bush, on the other hand, came
into office having hitched his fortunes to a massive supply-side
tax cut. But because supply-siders take it on faith that lowering
marginal tax rates will trigger economic growth, establishing
credibility among economists was much less of a concern.

All of which explains why the CEA staff was relieved when Columbia
economist Glenn Hubbard was finally appointed to be the Council's
chair. Though a committed supply-sider like Lindsey--and a devout
proponent of the tax cut-- Hubbard was at least highly regarded as
an academic. As one CEA economist puts it, "At least he was talking
the same language as the senior staff."

But Lindsey continued to exercise considerable influence even after
Hubbard's arrival, parceling out and supervising many of the
Council's projects. As another CEA economist describes it, "In the
current environment NEC functions as workload manager--distributing
projects and watching projects.... NEC is more integrated in the
work." And Lindsey's primary method for distributing and watching
projects was the CEA chief of staff, Diana Furchtgott- Roth, a
former colleague of his from the American Enterprise Institute
(AEI), who had spent her career advocating for conservative
economic causes and who once served as an economist at the American
Petroleum Institute, the lobbying arm of the oil industry. Former
CEA economists say Furchtgott-Roth exercises enormous authority
over substantive issues. "Diana's job is very much taking what she
hears in her meeting with Larry Lindsey each morning and turning it
into CEA analysis," explains one former colleague. (According to
Hubbard, Furchtgott-Roth attends the daily NEC staff meeting.)
Another complains, "She [has] a blatantly political agenda," and
recalls that Furchtgott-Roth once directed him to poke holes in
work another agency had already done because "Larry Lindsey said
... they did this analysis incorrectly." (Furchtgott-Roth says
through a spokesman that she has no recollection of the exchange.)
"If you're looking for a villain, she's it," says the economist.

By most accounts, the power Furchtgott-Roth wields is unprecedented.
The CEA chief of staff under Clinton was little more than an
administrative position and almost never exercised authority over
analytical questions. Many CEA chiefs of staff don't even have
backgrounds in economics. According to Tyson, "The chief of staff
when I was there was not involved in the substantive agenda.... It
was representing institutional issues." "In the past, I remember
getting direction from members," reflects another former CEA
staffer. "In this case, we also got direction from the chief of
staff. That was new." But even more troubling is Furchtgott-Roth's
role in representing a political adviser like Lindsey rather than
Hubbard, her ostensible boss. Peter Orszag, who worked in Clinton's
CEA, says flatly: "In my experience at CEA, it would have been
highly unusual for the chief of staff to represent the interests of
anyone other than CEA. That was what the chief of staff did."

Hubbard seems to have responded to Lindsey's influence not by
digging in his heels, like many of his predecessors, but by making
CEA more political itself. One of his early acts as CEA chairman,
say former employees, was to ask senior staff to identify the
economic literature that showed a strong correlation between
economic growth and tax cuts. "He had me talk with macro modelers
like [well-known conservative] Allen Sinai to try to get more
concrete empirical analysis that supported it," says a former CEA
economist in charge of tax policy. On one occasion, Hubbard came
across a report by the conservative Heritage Foundation that he
found promising, and he asked for a more credible source that made
a similar argument. "Hubbard was interested in it," the economist
recalls. "But he said, `No one's going to believe this.' So he sent
me off looking for other sources of information." (Hubbard has no
recollection of the episode.)

Another CEA staff economist recounts a similar experience while
working on Social Security. Hubbard had become interested in a
short article by AEI Fellow Kevin Hassett comparing the returns
under a hypothetical private pension system to actual returns under
Social Security. Eager to make use of the analysis, Hubbard asked
the staffer to reexamine Hassett's work to see if it checked out.
When he did, the numbers proved misleading--the economist notes that
Hassett's argument broke down "quickly once you worked past its
carefully constructed example"--and Hubbard declined to recommend
them for use elsewhere in the administration. But neither did he
call attention to the shortcomings in the privatization argument.
Instead, Hubbard simply tried a different approach: He dispatched
another CEA economist, Jeffrey Brown, to help author the Bush
administration's Social Security report, which made the case for
privatization not on the basis of financial returns but on overtly
political grounds like the value of individual choice. (Hubbard
recalls a short, nontechnical piece he co- authored with Hassett
for AEI, but not the incident in question; he confirms having
assigned Brown to the Social Security task force.) In principle,
one could defend the value of having an economist like Brown work
on the report. Yet once CEA had discredited the economic rationale,
it's not clear how much a CEA economist could contribute to a
commission set up to propose privatization.

Of course, as Orszag points out, working at CEA means "there's
always a tension between being relevant and being academically
pristine." But usually this results in CEA economists and members
agonizing over whether they're comfortable with an argument the
administration favors--and respectfully disagreeing when they're
not. Orszag, for example, recalls the Clinton administration's
efforts to link free trade with job growth, whereas the real
benefit lay not in adding jobs but in replacing them with better
ones. "CEA was always very reluctant to say trade is good because
it creates jobs, even though it was the rhetoric of other agencies
and the president," he says. At the current CEA, however, these
distinctions are almost never made. Instead, the basic operating
assumption is that CEA's position is the administration's
position--regardless of the underlying economics.

Perhaps the most glaring instance of this, former CEA officials say,
was Hubbard's performance during last fall's stimulus debate. The
original House bill, which the president supported, was by all
accounts laughable. Even the president's own Treasury secretary,
Paul O'Neill, referred to it derisively as "show business."
Academic economists tended to see its numerous longer-term
measures--a repeal of the corporate alternative minimum tax, a
three-year-long tax break for investment--as exactly wrong for the
short-term economic problems facing the country. Hubbard had even
endorsed that logic himself in a 1996 academic paper. Nonetheless,
he spent the fall defending a similar proposal and criticizing
rival ones, often suspending the laws of economics to do so. In
December CEA released the intellectual forebear to the February
study--a two- page report asserting that the stimulus bill's
business tax provisions "address[ed] the fundamental source of
economic weakness over the past year." One month earlier Hubbard
had dubbed it "a major fallacy to praise new [Democratic] spending
plans as `stimulus'" in a Washington Post op-ed, which one former
CEA member says "was just a joke." "This is no one's economics,"
the former member says. "It's not even right-wing economics.... If
an undergrad wrote that, you'd give the statement and the logic
behind it a D."

Would any one economic decision have come out differently had the
Bush CEA been more independent? It's impossible to say. An
assertive CEA might have objected to the Bush energy plan's
near-exclusive emphasis on supply-- citing the potentially larger
gains from reducing demand--or to the stimulus plan's long-term
giveaways. But even if it had, an administration bent on rewarding
the business interests that helped elect it probably wouldn't have
backed down. Even former Clinton CEA officials concede they spent a
lot of time being ignored.

On the other hand, there has been at least one instance where the
White House was genuinely torn between economics and politics: the
internal debate over steel tariffs, which, by all accounts, was
agonizingly close. To his credit, Hubbard--like his predecessors in
other administrations--opposed steel tariffs as economically
counterproductive. But the reason some of those predecessors
succeeded in blunting the political urge toward protectionism was
their prestige as independent economists. By the time this spring's
steel decision came along, Hubbard had already undermined that
independence. And once you've lost your independence as an
economist, you're just another political adviser--which means you
might as well not be there at all.

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