The Region

Advocates for Efficiency

To Remain Influential, Federal Economists are Having to Learn the Language Of Politics

Robert H. Nelson

Published February 1, 1991  | February 1991 issue

Robert H. Nelson has been a member of the economics staff at the Interior Department's Program Analysis since 1975.

Just a few years back, Treasury Department economists, led by Eugene Steuerle, published an analysis that turned out to be central to the decision to lower and flatten the structure of U.S. tax rates.

Meanwhile, economist Hayden Boyd of the Commerce Department helped persuade Congress to drop counterproductive import restrictions on books manufactured abroad.

And in the Interior Department, years of analysis by economist Richard Wahl paid off when the Bureau of Reclamation turned toward supply and demand, rather than government decisions, as a means of allocating precious Western water resources.

In these and other cases, federal economists have played central roles in debates on issues affecting millions of Americans.

Today, practitioners of "the dismal science" are more numerous than ever in the federal government. Indeed, Uncle Sam is by far the nation's largest employer of economists: Nearly 13,000 federal workers identify, themselves as economists.

And there's no doubt that economists' potential for influence is increasing, for public policy today is becoming more and more synonymous with economic policy. In international affairs, while the political and military conflicts of the Cold War have waned, economic relationships with the European Economic Community, Japan and other nations have come to the fore. Domestically, issues of deregulation, the energy crisis, budget deficits and tax policy—all economic matters—continue to dominate policy debate, as they have for the past 15 years.

Economic analysis is more and more the currency of Washington policy debate. Proponents of new policies are expected to make a case that growth, greater productivity, rising incomes and other economic gains will result. The current drive to improve American education thus is often justified as an investment in US economic competitiveness. Some see benefit cost analysis and other economic methods as a means to attain a long-elusive goal—an objective measure of the public interest. Economics promises quantitative, and thus hard and unambiguous, results. By using the common denominator of dollar evaluations, program expenditures in diverse areas can be compared and their relative importance assessed.

Yet, federal economists today also face many challenges and uncertainties as to their role in government. The conclusions of economic analysis have often proven fragile, heavily dependent on assumptions that are themselves the subject of widespread disagreement among economists and others. Long-running disputes over the budget consequences of "supply-side" economic theory offer one example.

Observers often say that economists' "way of thinking," rather than any quantitative determinations or other technical calculations, represents their most influential contribution to the policy process. Thus, some argue that economists have no special claims to objectivity and are really partisans for a particular ideology or set of values embedded in their discipline. Indeed, environmental and other groups today often charge that economists' use of market valuations and other typical practices are inherently offensive to these groups' basic values.

Government economists will also be affected by a continuing erosion in the status of professionalism in American life. Once seen as experts who could impartially apply their specialized knowledge, professionals and their associations today are often viewed as serving their own interests, biases and special values. One consequence is a tendency to treat all decisions as political decisions, instead of leaving some to professional authorities such as economists.

Economists Rising

The government began employing professional economists around the turn of the century, when theorists of the progressive movement argued that federal functions should be expanded and administered with a new efficiency by expert professionals. The Federal Reserve System, created in 1913, was one of the first agencies to make heavy use of economics professionals. The Bureau of Agricultural Economics, created in 1922, provided economic data and analysis for top-level decision-makers. During the Depression years, the development of national income statistics set the stage for the employment of many economists in Commerce's Bureau of Economic Analysis and in Labor's Bureau of Labor Statistics. World War II brought a further influx of economists—including John Kenneth Galbraith, Milton Friedman and many other prominent economists of the post-war generation—to support federal economic planning on a greatly increased scale. In the State Department, for example, wartime demands led to a fivefold increase in the number of economists, to about 500, and to the creation of the Bureau of Economic Affairs in 1944.

The rising prestige and influence of economists was reflected in the establishment of the Council of Economic Advisors (CEA) in 1946. The new doctrines of John Maynard Keynes prescribed that economists should guide the American economy on a happy course of high employment and stable prices, and the three-member CEA and its staff of 15-20 professionals was assigned a leading role in the attempt.

The standing of government economists reached its peak in the 1960s under the CEA chairmanship of Walter Heller. Heller was the architect for the "Kennedy tax cut," which helped to stimulate rapid economic growth with low inflation. It would be a short-lived ascendancy, however; the "stag-flation" and other macroeconomic problems of the 1970s and 1980s failed to follow economists' theories and resisted their prescriptions. The public became skeptical about economists' ability to predict economic events, and a low point came when President Reagan suggested that the CEA might well be abolished.

While the macroeconomic management skills of economists thus fell into disrepute, the rise of Big Government spawned by the New Deal encouraged rapid expansion in federal jobs for economists. They were hired to evaluate health, education, poverty, environmental and other new programs. In the 1930s, for the first time, federal legislation required benefit cost studies for proposed water supply projects of agencies such as the Bureau of Reclamation. Using some of the methods developed for this purpose—along with systems analysis, cost effectiveness and other efficiency studies—the Defense Department introduced systematic use of economic analysis in the 1960s. At the end of that decade, and in the 1970s, similar efforts were extended throughout the domestic side of the government. The Resources Planning Act of 1974, for example, required the Forest Service to conduct extensive economic planning for the national forests on a five-year schedule.

These developments produced a steady rise in agencies' employment of economists. In 1947, the government classified 2,221 employees as economists. The number grew to 3,480 in 1961, 4,314 in 1970, and 5,298 in 1977. The growth rate then slowed, and the latest statistics from the Office of Personnel Management, as of Sept. 30, 1987, showed federal employment of economists at 5,707.

Economics or Policy Analysis?

Many federal employees undertake economic tasks, even while their positions have "budget," "program analyst" and other formal job descriptions. The shift of responsibility for economic analysis to such positions has been an important trend in recent years.

The old idea—dating to the progressive era—had been that economic considerations could be separated in government decision-making and thus left to people whose training was largely in economics. But now in many areas, the economic elements often seemed to be jumbled inextricably with political, legal, ethical and other concerns. Thus, a new breed of expert emerged: the professionally trained policy analyst. New professional schools of policy analysis such as the Kennedy School at Harvard University sought to instill in their students a foundation of economic thinking, but also to train them in such diverse fields such as politics, law and management.

Simultaneously, offices with related titles such as policy analysis, program planning and policy evaluation spread throughout the federal government.

When federal employees are directly surveyed concerning their professional status, many more identify themselves as economists than are so classified by OPM. Thus, while OPM was saying there were fewer than 6,000 federal economists, a National Science Foundation survey in 1986 found that 12,800 federal employees described themselves as economists. They represented about 8 percent of all professional economists in the United States.

A Question of Influence

Economists often question how much their work really influences policy. In the rough and tumble world of Washington politics, politicians and interest groups often find the studies of government economists a distraction if not an outright obstacle. More and more, the work of federal economists is challenged by studies by private economists-for-hire, as in recent tax debates.

Yet federal economists have made a difference in many cases. For example, career economist Mollie Orshansky, while working for the Social Security Administration in the early 1960s, devised precise definitions of minimally adequate income that varied according to family size and composition. The resulting "poverty line" was used to produce official statistics on the numbers of Americans living in poverty—statistics still widely employed in assessing the impact of federal programs on the poor.

Government economists also educate top decision-makers in the working of the economy. Many of these high officials are surprisingly ignorant about the use of the market mechanism, or even antipathetic to it, despite their lip service to the merits of American capitalism. In the 1970s and 1980s, transportation, communications and other industries were deregulated, in a limited American form of perestroika that replaced bureaucratic planning and allocation with a market allocation. The vocal objections of adversely affected groups were overcome, as numerous government economists undertook influential analyses showing that increased competition could save American consumers money.

An example of successful advocacy of market solutions is found in the case of Richard Wahl of the Interior Department's Office of Program Analysis. Showing the ability to undertake diverse tasks often required of a government economist, Wahl studied both past Bureau of Reclamation activities setting precedents for water marketing and ways to surmount current legal obstacles to establishment of water markets. His efforts helped enlist the support of the Western Governors' Association and also complemented the work of environmental groups that had come to see water markets as a way to use Western water more efficiently, defusing pressure for building more dams.

Tax debates of the mid-1980s showed that government economists can occasionally play central roles in crucial policy decisions. Drawing on many years of research in and out of government, economists in the Treasury Department had long argued that the numerous loopholes in the tax code not only eroded the tax base but also promoted such economic inefficiencies as the artificial stimulation of housing production. A working group led by Eugene Steuerle of Treasury's Office of Tax Analysis in 1984 produced a formal blueprint for fundamental reform of the tax code. Many political compromises later, the historic Tax Reform Act of 1986 enacted some of their concepts into law.

Advocates for Efficiency

Economists have long been trained to limit their activities to technical analyses, leaving politics to the politicians. Yet many government economists—especially those at top levels who advise policymakers—have found this prescription unworkable. Indeed, many economists have effectively become advocates and political players themselves, devising strategies for adoption of efficient economic policies.

Reflecting these experiences, some current and past government economists say the role of federal economists should be redefined. Charles Schultze, former Budget Bureau director and CEA chairman, argues that economists shouldn't lock themselves out of politics but rather should serve as "partisan advocates for efficiency."

Schultze's view is widely held by economists in government, but it raises such difficult questions as whether efficiency can really be measured objectively or whether the efficiency goal may serve as a stalking horse for an economist's own values.

Still, as Congress and political appointees intrude further and further into matters once reserved for professional experts, federal economists who seek policy influence have little choice. They, along with other professionals in government, are having to lean new communications, tactical and other skills to operate more successfully in the political process. Future professional training may need to supplement teaching of basic skills with instruction in historical interpretation, the workings of the law, political strategy and perhaps even the philosophical and ethical implications of alternative policy proposals.

Since the politicizing of government decision-making shows no signs of abating, the future effectiveness of government economists at high levels may depend on their ability to speak the language and to understand the ways of popular advocacy and political persuasion.

This article originally appeared in the December 1990 issue of Government Executives; reprinted and excerpted with permission.

Economists and the Fed

Economists have a rich history within the Federal Reserve System, both as support staff in the formation of central bank policy and as policy advocates themselves.

Indeed, from its inception the System was partly the result of the vision of an economist H. Parker Willis. Willis was handpicked by Congressman Carter Glass, one of the authors of the 1913 Federal Reserve Act, to serve as an adviser to the House Committee on Banking and Currency, and Glass often credited Willis for his work on the monumental banking legislation.

An economist, teacher and writer, Willis served as the Federal Reserve Board's first secretary and in 1918 was named director of research for the Board. Willis' professional career—encompassing his service at the Fed, his classroom lectures, speeches, journal articles and books—is, in a sense, a microcosm of the present-day Federal Reserve System economics team.

Today, economists at the Board and the 12 district banks engage in research, analysis and forecasting that not only serves to inform and influence members of the Board, but also Congress, the administration and the general public. Willis' economics heirs have even ascended to the Fed's most powerful post— chairman of the Federal Reserve Board. Current Chairman Alan Greenspan was a private economist and presidential adviser before joining the Fed; among others, past Chairman Arthur Burns had a distinguished career as an economist outside the Fed, as does Greenspan's predecessor, Paul Volcker.

Preston Miller, vice president and deputy director of research at the Minneapolis Fed, described the Fed economists' mission in this way: "All roads should eventually lead to better ways to formulate and implement policy or ways to reshape institutions that are the objects of policy." (From The Region, June 1990, in an article about the Minneapolis Fed's Research Department.)

To fulfill that mission, the Fed employs about 200 research economists at the Board in Washington, D.C., and about 250 at the 12 district banks (about a dozen at the Minneapolis Fed), including senior executives. Along with assistants, advisers, consultants and visiting scholars, the Fed's diverse Research departments investigate matters relating to monetary policy, capital markets, financial structure, general economic activity, regional economics, fiscal analysis, international studies, macroeconomics, micro statistics and many others.

Sometimes Fed economists investigate issues that are at the forefront of current policy debate, such as the current deliberations over deposit insurance reform; other times the Fed conducts research at the behest of the president, such as when President Bush recently called on Chairman Greenspan to lead a study on the merits of cutting capital gains taxes; but most times Fed economists go about the business of monitoring and analyzing the economy to provide input to the Board and the Federal Open Market Committee.