ERP1990 Appendixes 1

Appendix AREPORT TO THE PRESIDENT ON THE ACTIVITIES

OF THECOUNCIL OF ECONOMIC ADVISERS DURING 1989

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LETTER OF TRANSMITTAL

COUNCIL OF ECONOMIC ADVISERSWashington, D.C., December 31, 1989

MR. PRESIDENT:The Council of Economic Advisers submits this report on its ac-

tivities during the calendar year 1989 in accordance with the re-quirements of the Congress, as set forth in section 10(d) of the Em-ployment Act of 1946 as amended by the Full Employment andBalanced Growth Act of 1978.

Sincerely,

Michael J. Boskin, ChairmanRichard L. Schmalensee, MemberJohn B. Taylor, Member

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Council Members and their Dates of Service

Name

Edwin G. NourseLeon H. Keyserling ..

John D Clark

Roy BloughRobert C. TurnerArthur F BurnsNeil H. JacobyWalter W Stewart ..Raymond J. Saulnier

Joseph S. DavisPaul W McCrackenKarl Brandt .Henry C. WallichWalter W. HellerJames TobinKermit GordonGardner Ackley

John P. LewisOtto EcksteinArthur Ml. Okun

James S DuesenberryMerton J. PeckWarren L SmithPaul W. McCrackenHendrik S HouthakkerHerbert Stein

Ezra SolomonMarina v.N. Whitman .Gary L SeeversWilliam J FellnerAlan GreenspanPaul W MacAvoy .Burton G. MalkielCharles L. SchultzeWilliam D NordhausLyleE. GramleyGeorge C. EadsStephen M GoldfeldMurray L WeidenbaumWilliam A. NiskanenJerry L JordanMartin FeldsteinWilliam PooleBeryl W. SprinkelThomas Gale MooreMichael L MussaMichael J. BoskinJohn B TaylorRichard L. Schmalensee

Position

ChairmanVice ChairmanActing ChairmanChairmanMemberVice ChairmanMemberMemberChairmanMemberMemberMemberChairmanMemberMemberMemberMemberChairmanMemberMemberMemberChairmanMemberMember

Chairman

MemberMemberChairmanMemberMemberChairmanMemberMemberMemberMemberChairmanMemberMemberChairmanMemberMember

MemberChairmanMemberMemberChairmanMemberChairmanMemberMemberChairmanMemberMember

Oath of office date

August 9, 1946August 9 1946November 2, 1949May 10, 1950August 9 1946May 10, 1950June 29 1950September 8, 1952March 19 1953September 15, 1953December 2 1953April 4, 1955December 3, 1956May 2, 1955December 3 1956November 1 1958May 7, 1959January 29, 1961January 29 1961January 29 1961August 3, 1962November 16 1964May 17, 1963September 2 1964November 16, 1964February 15, 1968February 2 1966February 15, 1968July 1 1968February 4, 1969February 4 1969February 4, 1969January 1 1972September 9, 1971March 13, 1972July 23, 1973October 31 1973September 4, 1974June 13 1975July 22, 1975January 22, 1977March 18 1977March 18, 1977 .June 6, 1979August 20 1980February 27, 1981June 12, 1981July 14, 1981October 14 1982December 10 1982April 18 1985July l 1985August 18 1986February 2, 1989June 9 1989October 3 1989

Separation date

November 1, 1949.

January 20, 1953.

February 11, 1953.August 20 1952January 20, 1953.December 1, 1956February 9, 1955.April 29, 1955.

January 20, 1961.October 31, 1958.January 31 1959January 20, 1961.January 20, 1961.November 15, 1964.July 31, 1962.December 27 1962

February 15, 1968August 31, 1964.February 1, 1966.

January 20, 1969.June 30 1968January 20, 1969.January 20, 1969.December 31, 1971.July 15, 1971.

August 31, 1974.March 26, 1973.August 15, 1973.April 15, 1975.February 25 1975January 20, 1977.November 15 1976January 20, 1977.January 20, 1981.February 4 1979May 27 1980January 20, 1981.January 20 1981August 25, 1982.March 30, 1985.July 31 1982July 10 1984January 20 1985January 20 1989May 1 1989September 19 1988


Report to the President on the Activities of theCouncil of Economic Advisers During 1989

The mission of the President's Council of Economic Advisers wasestablished by the Employment Act of 1946: to advise the Presidenton the most effective means "to promote maximum employment,production and purchasing power." The Council accordingly focuseson providing the President with the best possible advice and eco-nomic analysis on the economic outlook and proposed economicpolicies. This focus usually complements the diverse perspectivesand specific concerns of other agencies in the policy formulationprocess.

The membership of the Council of Economic Advisers changedearly in 1989, upon the inauguration of the new President. Presi-dent Bush nominated Michael J. Boskin as Chairman of the Coun-cil on January 20, and on February 2, 1989, following unanimousSenate confirmation, Dr. Boskin was designated Chairman of theCouncil and was sworn into office. He succeeds Beryl W. Sprinkel,who returned to the private sector. The Chairman is on a leave ofabsence from Stanford University where he is the Burnet C. andMildred Finley Wohlford Professor of Economics.

President Bush nominated John B. Taylor and Richard L.Schmalensee as the two other Members of the Council on May 1and July 20, respectively. After Senate confirmation, Dr. Taylorand Dr. Schmalensee were officially sworn in on June 9, 1989, andOctober 3, 1989, respectively. Both served as full-time consultantsbetween the time of their nomination and official swearing in. Dr.Taylor is on a leave of absence from Stanford University where heis Professor of Economics. Dr. Schmalensee is on a leave of absencefrom the Massachusetts Institute of Technology where he is theGordon Y Billard Professor of Economics and Management.Thomas Gale Moore resigned from the Council on May 1, 1989, andreturned to the Hoover Institution at Stanford University.

During this first year, the Council has stressed the importance ofmaximizing sustainable economic growth to expand the real re-sources available to meet the needs and designs of all Americans.It also stressed the importance of setting ambitious, but realisticgoals. In its interactions with various outside groups—the Con-gress, the press, the business community, international organiza-tions—as well as within the Administration, the Council has em-phasized that continued growth and higher standards of living re-


quire following the four principles of fiscal, monetary, regulatory,and trade policy outlined in this year's Report:

• Reduce government borrowing by slowing the growth of Federalspending while economic growth raises revenue until the budgetis balanced, and reduce the national debt thereafter;

• Support a credible, systematic monetary policy program thatsustains maximum economic growth while controlling and re-ducing inflation;

• Remove barriers to innovation, investment, work, and saving inthe tax, legal, and regulatory systems;

• Avoid unnecessary regulation and design necessary regulatoryprograms to harness market forces effectively to serve theNation's interest; and

• Continue to lead the world to freer trade and more openmarkets, and to support market-oriented reforms around theworld.

MACROECONOMIC POLICIES

Economic growth was more moderate in 1989 than the rapid paceof 1987 and 1988. Significantly, inflation was contained. The Coun-cil emphasized that the run-up of inflation early in 1989 was tem-porary and related to temporary disruption in the world oil marketand the drought. Throughout the year, the Council closely followedmacroeconomic developments, briefing the President, and partici-pating in regular discussions on macroeconomic policy issues withthe Department of the Treasury, the Office of Management andBudget (OMB), and other members of the President's economicteam. The Council also regularly exchanged information and metwith the Federal Reserve Board on macroeconomic policy issuesand the economic outlook.

The Council and the other members of the Administration's fore-casting "Troika"—Treasury and OMB—made good progress in es-tablishing the credibility of the new Administration's economicforecasts. This interagency forecasting group, which is chaired bythe Council, develops the economic forecast and projections used indeveloping the budget. The forecasts made in the spring serve asthe official economic assumptions for the Gramm-Rudman-Hollingsbaseline for the following fiscal year. The Administration's firstfull forecast was widely described as reasonable and internally con-sistent when it was released with the Mid-Session Review in July.Dr. Boskin testified on the forecast along with Dr. Taylor beforethe Joint Economic Committee. Although the forecast was a bitmore optimistic than the average of private forecasters, it has thusfar tracked the economy quite well and as the year progressed,many forecasters revised their expectations for 1989 towards theAdministration's forecast. Based on preliminary data, it wouldappear that for the four major forecast variables—real GNP


growth, inflation, unemployment, and interest rates—the Troikaforecast for 1989 was the most accurate forecast presented in thehistory of the mid-session budget reviews dating back to the late1970s. In preparing its forecast for the 1991 budget, the Troikadeveloped and published alternative sets of economic assumptions toindicate that the forecast and the resulting budget calculations havea considerable degree of uncertainty.

The Council also worked to improve the economic informationflow through a more comprehensive series of memoranda and brief-ing papers on economic events for the President and his WhiteHouse Senior Staff; regular briefings for the White House press onmajor economic news; and meetings with outside economists, fore-casters, financial analysts, and business people. The Chairman andCouncil Members appeared before numerous other organizationsexplaining the Administration's economic achievements, principles,and policies.

In the formulation of saving and investment policies, the Councilwas one of the leading participants in developing proposals throughvarious Cabinet and sub-Cabinet working groups. In testimony tothe Congress and in talks to business and other groups, the Chair-man and the other Council Members stressed the importance ofraising national saving—by lowering the Federal budget deficit andremoving barriers to private saving—to reduce the cost of capitalto American firms, stimulate investment, and improve U.S. com-petitiveness, productivity growth, and standards of living. TheChairman and the other Council Members also worked throughvarious fora to educate the public and the Congress on the econom-ic benefits of a lower capital gains tax rate.

The Council was also active on a range of budget issues this year.The Chairman was a member of the President's budget team andtestified before a number of congressional committees on both theeconomic assumptions used in the budget and on the importance tothe economy of lowering the Federal budget deficit and eventuallyreducing the national debt. The Chairman was also a member ofthe President's review committee for the 1991 budget.

INTERNATIONAL ECONOMIC POLICIES

During 1989, international economic issues occupied a substan-tial part of the Council's time. Developments in the Eastern Euro-pean economies called for economic analysis in preparing the Presi-dent's initiatives. As the current GATT round entered its finalstage, many economic issues required analysis. Despite substantialprogress in reducing the U.S. trade deficit in recent years, 1989 wasa year of growing protectionist pressure. Growing concern over for-eign investment in the United States was especially important ingenerating this increased pressure. The Chairman and the otherCouncil Members strove to put these fears in perspective, stressing


the benefits of free trade and open markets for goods, services, andinvestment. They regularly reminded the Congress and others thatforeign investment had helped to prevent the investment rate—afundamental source of improvements in productivity and standardsof living—from falling, despite the Federal budget deficit and lowpersonal saving. In the Congress and before various foreign govern-ments and international organizations, the Council repeatedlystressed the importance of freer trade and more open markets andthe dangers to world economic growth of rising protectionism.

The Council was also increasingly active in trade policy issuesthrough Dr. Boskin's participation in the Economic Policy Counciland Dr. Taylor's membership in the Trade Policy Review Group.The Council assisted the Administration in producing many impor-tant trade decisions that carefully balanced competing interestsand goals on: steel quotas; Super 301; strategy for the ongoingGATT round; and many other issues.

The Council undertook an increased role in its participation ininternational discussions. Dr. Boskin was one of the four leaders ofthe President's Mission to Poland and was named a deputy coordi-nator of U.S. aid to Poland and Hungary. Dr. Taylor also partici-pated in the Mission and was active in developing the economicanalysis through an interagency group on policy planning forPoland and Hungary.

Dr. Boskin met in Japan with the Prime Minister and other offi-cials to encourage Japan to shoulder its responsibilities as thesecond largest economy in the world by joining the United Statesin leading the world to freer and fairer trade. Dr. Taylor was amember of the Structural Impediments Initiative negotiating teamand met with Japanese officials in New York, Tokyo, and Washing-ton to discuss ways to reduce barriers to trade. He also testifiedbefore the Senate Finance Committee on the importance of thesestructural issues. Dr. Boskin and Dr. Taylor traveled to Tokyo todiscuss the economic outlook and various structural issues withJapan's Economic Planning Agency, and Dr. Taylor participated inbiannual sub-Cabinet meetings in Tokyo and Washington.

Dr. Boskin was elected Chairman of the Economic Policy Com-mittee of the Organization for Economic Cooperation and Develop-ment (OECD). Dr. Schmalensee chaired the U.S. delegation toOECD Working Party 1, which focuses on structural change in thedeveloped economies, and Dr. Taylor was a member of the U.S. del-egation to Working Party 3 on macroeconomic policy coordinationand the short-term economic outlook. Dr. Taylor traveled to Paristo chair the U.S. delegation to the Economic and DevelopmentReview Committee, where the OECD reviews the U.S. economy,and chaired meetings in Washington with the IMF and GATT intheir review of U.S. economic policy. In these roles the Council


stressed the importance of multilateral adjustment to trade imbal-ances, macroeconomic coordination, and the removal of structuralrigidities and subsidies.

The Council provided the President and the White House seniorstaff with regular briefings and briefing materials on internationaldevelopments, including materials for the Economic Summit inParis and the meetings in Malta between the President and Secre-tary General Gorbachev.

The Council also participated in discussions of a wide range ofissues—including developing country debt, economic reform inEastern Europe, and macroeconomic policy coordination—withother members of the Administration, the Federal Reserve, theWorld Bank, the IMF, and representatives of other countries. TheCouncil and staff conducted numerous briefings on the U.S. econo-my for visiting officials and scholars.

MICROECONOMIC POLICIES

The Administration considered and proposed action this year ona wide range of economic issues, many of them involving problemsthat had been building for some time. In its work on these issues,the Council repeatedly stressed that where government regulationis appropriate, it should be formulated in a way that allows work-ers and firms maximum flexibility and provides incentives to meetsocial goals in the least costly manner. The Council also providedeconomic analysis of a variety of continuing issues. The Councilworked with other agencies to assure that the Clean Air Act pro-posal balanced costs and benefits in protecting the environmentand minimizing the costs of regulation. The Council emphasizedthese principles of promoting flexibility, enhancing incentives, bal-ancing costs and benefits, and placing maximum reliance on theprivate sector in a number of areas, including: global warming,telecommunications, antitrust, food safety, strategic oil stockpiling,and proposals by the Council on Competitiveness to remove regula-tory and legal barriers to innovation. Dr. Schmalensee testifiedbefore the Congress on the economic importance of tradable per-mits in the Clean Air Act proposals. He also chaired the Interagen-cy Task Force on Economic Costs of the Working Group on GlobalClimate Change.

The Council also participated in various interagency workinggroups in developing policies to aid the disadvantaged without de-stroying incentives and job opportunities. Dr. Schmalensee was amember of the Low Income Opportunity Board and was active inthe analysis of the economic costs and benefits of the Americanswith Disabilities Act (ADA). The Administration's accomplishmentsin this area include passage by the Congress of the first trainingwage in the history of the U.S. minimum wage, and improvements


in the Job Training Partnership Act. The Council also actively pro-moted the importance of improving education in the United Statesthrough flexibility, choice, accountability, and performance, thevalues that underpin the Educational Excellence Act.

ECONOMIC STATISTICS

The Chairman and the other Council Members took an activerole in improving the quality of the U.S. statistical system.Through testimony before the Congress, public speeches, and inter-agency working groups, the Council stressed the relationship ofgood information to good policy. Dr. Boskin chaired an EconomicPolicy Working Group on Improving the Economic Statistics. (Itswork is described in detail in Appendix B.)

PUBLIC INFORMATION

In addition to the Chairman's and the other Council Members'public speeches, testimony before the Congress, and briefings forthe press, the Council produces two publications a year for thepublic.

The Council's Annual Report is the principal medium throughwhich the Council informs the public of its work and its views. It isan important vehicle for presenting the Administration's domesticand international economic policies. Annual distribution of theReport in recent years has averaged about 45,000 copies. The Coun-cil assumes primary responsibility for the monthly Economic Indi-cators, which is issued by the Joint Economic Committee of theCongress and has a distribution of approximately 10,000.

THE COUNCIL AND THE STAFF

The Chairman is responsible for communicating the Council'sviews on economic developments to the President through personaldiscussions and written reports. The Chairman also represents theCouncil at Cabinet meetings, meetings of the Economic PolicyCouncil and Domestic Policy Council, meetings of the National Se-curity Council on issues of economic importance, daily WhiteHouse senior staff meetings, budget team meetings with the Presi-dent, and at many other formal and informal meetings with thePresident and senior White House staff, as well as with othersenior government officials. The Chairman guides the work of theCouncil and exercises ultimate responsibility for directing the workof the professional staff.

Members of the Council are responsible for the full range ofissues within the Council's purview, and including direct supervi-sion of the work of the professional staff. Members represent theCouncil at a wide variety of interagency and international meet-


ings and assume major responsibility for selecting issues for Coun-cil attention.

The small size of the Council permits the Chairman and theother Members to work as a team on most policy issues. There is,however, an informal division of subject matter. Dr. Schmalensee isprimarily responsible for microeconomic and sectoral analysis andregulatory issues. Dr. Taylor is primarily responsible for interna-tional economic issues as well as for macroeconomic analysis, in-cluding economic projections.

PROFESSIONAL STAFF

The Council's advice to the President is dependent on the analyt-ical and empirical analysis of its professional staff. The Councilbenefited from an extraordinarily capable professional staff during1989. The professional staff of the Council currently consists of theSpecial Assistant, the Senior Statistician, 10 senior staff econo-mists, 2 staff economists, 3 junior staff economists, and 2 researchassistants. The professional staff and their respective areas of con-centration at the end of 1989 were:

Special Assistant to the Chairman

J. Steven Landefeld

Senior Staff Economists

John M. Antle Agriculture and International TradeRebecca M. Blank Labor Economics and Human ResourcesSusan M. Collins International Macroeconomics and TradeHoward K. Gruenspecht Regulation and International TradeDouglas J. Holtz-Eakin Public Finance and MacroeconomicsBrian F. Madigan Macroeconomics and Monetary PolicyMarc S. Robinson Public Finance and MicroeconomicsJeremy C. Stein Finance and BankingPeter M. Taylor Macroeconomics and ForecastingWilliam L. Wascher Labor and Macroeconomics

Senior Statistician

Catherine H. Furlong

Staff Economists

S. Lael Brainard International Trade and MacroeconomicsBarbara A. Claffey Agriculture and International Trade

Junior Staff Economists

Janice C. Eberly Macroeconomics and InternationalEconomics

Elizabeth T. Powers Public Finance and Microeconomics


David E. Weinstein International Trade

Research Assistants

Mark A. Condon Labor and MacroeconomicsBeth Anne Wilson Macroeconomics and International

Economics

Jonathan S. Leonard (University of California, Berkeley) servedas a senior staff economist during the summer of 1989. Gary R.Saxonhouse (University of Michigan) served as a part-time consult-ant during the fall of 1989. Jeremy A. Arkes (Georgetown Universi-ty), Scott B. McCallum (University of California, Berkeley), StevenH. Pious (Georgetown University), Brooke D. Rasche (Stanford Uni-versity), and Omar N. Toulan (Georgetown University) served asresearch assistants during 1989.

Catherine H. Furlong, Chief Statistician, began her career at theCouncil 40 years ago as a statistical assistant. She is now our ChiefStatistician and is responsible for the management of the Statisti-cal Office. Her tenure has been one of exemplary service, and herdedication and performance have earned her the respect andfriendship of the Chairmen, the Council Members and staffs withwhom she has served.

Mrs. Furlong is assisted in the operation of the Statistical Officeby Natalie V. Rentfro, Linda A. Reilly, and Margaret L. Snyder.The Statistical Office maintains and updates the Council's statisti-cal information system, and is responsible for overseeing the publi-cation of the Economic Indicators and the statistical appendix tothe Economic Report, as well as for the verification of statistics inmemoranda, testimony, and speeches.

Joseph Foote provided editorial assistance in the preparation ofthe 1990 Economic Report.

Two former staff members returned to assist in the preparationof the 1990 Report: Christine Dreylinger (student assistant), andDorothy Bagovich (statistical assistant).

SUPPORTING STAFF

The Administrative Office, which provides general support forthe Council's activities, consists of Elizabeth A. Kaminski, Adminis-trative Officer, and Catherine Fibich, Administrative Assistant.

The secretaries for the Council of Economic Advisers during 1989were Alice H. Williams and Sandra F. Daigle (secretaries to theChairman), and Francine P. Obermiller and Suzanne M. Tudor(secretaries to the Council Members). The secretaries for the Coun-cil's staff were Lisa D. Branch, Mary E. Jones, Mary A. Thomas,and Janet J. Twyman.


DEPARTURES

The Council's senior staff economists, in most cases, are onleaves of absence from faculty positions at academic institutions orfrom other government agencies or research institutions. Theirtenure with the Council is usually limited to one or two years.Most of the senior staff economists who resigned during the yearreturned to their previous affiliations. They are James N. Brown(State University of New York at Stony Brook), David N. Hyman(North Carolina State University), Carole E. Kitti (Office of Man-agement and Budget), Harvey E. Lapan (University of Iowa), andDaniel A. Sumner (North Carolina State University). Others wenton to new positions. They are Gregory S. Crespi (Southern Method-ist University), Lauren J. Feinstone (University of Colorado),Robert W. Hahn (American Enterprise Institute), and Kim J.Kowalewski (Congressional Budget Office).

Staff economists usually have just completed their dissertationsand spend one year at the Council as additional preparation fortheir professional careers. Staff economists who took new positionsare: Ellen E. Hanak (The Brookings Institution) and John A. Hird(University of Massachusetts). Junior staff economists are general-ly graduate students who spend one year with the Council andthen return to complete their dissertations. Those who returned totheir graduate studies in 1989 are: Marcel M. Cassard (ColumbiaUniversity), Kenneth R. Richards (University of Pennsylvania), andRobert J. Scheinerman (Harvard University). Associate junior staffeconomists were Theodore G. Bernard (Northwestern University)and William A. Teichner (Harvard Business School). Jonathan A.Parker, Research Assistant, accepted a position with The Urban In-stitute.

Gerry Garcia, secretarial staff, resigned in 1989. In addition,Christine Dreylinger served as a student assistant during thesummer, and Amy J. Heir served as a student assistant during thefall.



Documents

ERP1990 Appendixes 1