Council of Economic Advisers, Its Role, and Its Effect on Economy

Greenspan Bernanke
••• Ben Bernanke (R) flanked by Alan Greenspan (L) speaks after being nominated by U.S President George W. Bush to be Federal Reserve chairman October 24, 2005 in Washington, DC. Photo by Mark Wilson/Getty Images

The Council of Economic Advisers is an agency that advises the U.S. president on fiscal policy. It is within the Executive Office of the President. 

The Council consists of three distinguished economic analysts. The president appoints the members, and the Senate approves them. The members are usually high-level economic professors. They take a temporary leave from their regular university appointments to serve the president.

Their value is in providing unbiased advice. They should not be tied to any constituency.

Many Council members have also served, or go on to serve, in the Federal Reserve. Despite this, the Council does not advise the nation's central bank on monetary policy. It does, however, clearly express its point of view.

The academic background of CEA members provides a high level of technical sophistication. For example, they know how to use computer programs that model the economy. They can forecast growth, inflation, and employment with these models. They can also see what happens if they change certain assumptions. For example, they can tell you what would happen if more money was spent on early childhood education. The Council can also tell you what happens if nothing is done about climate change.

This expertise and fresh perspective provide an alternative viewpoint for the president. At the same time, these advisers usually share the current administration's political beliefs and goals.

They act as advocates within the federal government and Congress.

staff of 35 economists supports the CEA. They are specialists in areas like international trade, labor, and health care.

Role

Congress created the CEA as part of the Employment Act of 1946. It  wanted a group of experts to make sure the United States didn't fall into a Great Depression after World War II ended.

 

Congress directs the CEA to assist the president in five specific ways.

1. Prepare an annual Economic Report, released in February of each year. The report gives the economic background that supports the president's annual budget. It uses data and analysis to back up these priorities.The report explains what's happened to the economy over the past year. It also forecasts growth for next year. 

The report is valuable for three reasons. First, it summarizes what's happened to the economy, and what's likely to happen, from some of the most knowledgeable economists in the country. Although you may disagree with their interpretation, you can't argue with their credentials. Second, it's chock-full of useful trend data that's not easy to get elsewhere. Third, it gives you an insight into the president's budget. You'll understand why some areas are priorities, while others are being cut. In other words, it gives you the story behind the numbers.

2. Review economic indicators. Each month, the Council provides the Congressional Joint Economic Committee a summary of 11 crucial statistical areas. First is gross domestic product, which measures total economic output. Next is income and employment.

That's followed by production and business activity. It reports on inflation using the Consumer Price Index.

The CEA report also includes financial statistics, like the size of the money supply and credit. It also reports on security markets, federal finance, and international statistics. Within each of these areas are many related indicators. Here are the current and past reports. The CEA must also alert the president if trends impact current policy.

3. Review federal agencies. It recommends corrections to the president if agency activities don't support economic initiatives.The Council's neutrality is critical in this area. Agencies often have competing interests. For example, say the Labor Department wants to increase the minimum wage. The Commerce Department wants to keep it low. The CEA's neutrality allows it to advise the president based on economic impact alone.

 

4. Develop specific policies on a regular basis. By law, these policies must promote free competitive enterprise. They must also suggest ways to avoid future economic crises or end existing ones. Finally, the recommendations must also maintain employment and production. 

5. Prepare economic research reports. These reports cover a broad range of current issues. For example, the CEA reported on the economic benefits of expanded infrastructure investment. It suggested new ways to measure GDP. It looked at what happened to states that didn't expand Medicaid as part of Obamacare

How the CEA Affects the U.S. Economy

The CEA provides sophisticated guidance to the president as he formulates economic policy and prepares the annual budget. For example, it advised President Kennedy to cut taxes in the 1960s. The cut ended the recession and spurred economic growth.

The Council of Economic Advisers website provides sophisticated economic forecasts and reports. Use them to understand the economy, and better plan your personal finances. 

Four former Federal Reserve Chairs have also served on the Council of Economic Advisers. These include Janet YellenBen Bernanke, Alan Greenspan, and Arthur Burns. Reviewing the list of CEA chairs might give you an idea of who will be the next Fed chair.

Various presidents have used the Council in different ways. President Obama appointed the CEA chairs as part of his Cabinet. Their presence made sure economic considerations were part of high-level decisions. President Trump did not continue that policy.