The Council of Economic Advisers, an office made up of rotating advisory group of economists and their staff within the White House administrative structure, was created 70 years ago by the Employment Act of 1946.  In its First Annual Report to the President,  published in December 1946, the CEA tried to lay out its overall vision of public policy and the US economy. (For those who pay close attention to their prepositions, this First Annual Report to the President is not the same document as the first Economic Report of the President, which was published in January 1947. That document is a nuts-and-bolts overview of the status of the US economy circa 1946.)

Remember that back in 1946, the US economy had just gone through an extraordinary array of stresses and dislocations, including the brutality of the Great Depression from 1929-1933, the steep and severe recession of 1937-38, the disruptions of wartime production, and a post-World War II recession from February to October 1945. Thus, it\’s interesting to me that the CEA overview of economic policy sought to strike a balance between two extremes that have remained recognizable in policy discussions ever since, which they named \”The Spartan Doctrine of Laissez Faire,\” which had a somewhat fatalistic review that sometimes bad stuff just happens in the economy, and \”The Roman Doctrine of an External Remedy,\” which held that well-conceived government action could pretty much always prevent bad economic outcomes. Here\’s how the 1946 report described the two views.

\”THE SPARTAN DOCTRINE OF LAISSEZ FAIRE Early thinking about the general upswings and downswings of business were of a highly individualistic and essentially fatalistic character. Those who follow this line of thought—and some still do—accept the cycle as a result produced by causes deeply rooted in physical nature or in fundamental human behavior and following an intricate pattern of short-, medium-, and long-time swings. They do not claim that this pattern is precise as to timing or invariable as to magnitude, like the movement of the stars. But they do think in terms of essentially mechanical relationships rather than human institutions that can be modified by intelligent action in a republic, and human behavior that can be changed by wise leadership. …

THE ROMAN DOCTRINE OF AN EXTERNAL REMEDY Unlike those whose belief in the external character of the cycle causes them to conclude that nothing can be done about it but to adapt one\’s business operations or exploit it for individual profit, a second group would master the cycle by a remedy equally external to the processes of private business—the power of government to spend and create a purchasing medium. There has arisen in recent years a widespread belief that, whatever the \”cyclical\” forces beating upon business in general or whatever adaptations to such forces may be spontaneously made by the dictates of private managerial understanding or prudence, the economy as a whole may be kept on a reasonably even keel merely through the intervention of central government in the monetary and fiscal area. According to this philosophy of external remedy, the essential phenomenon of a business depression is a too restricted volume of purchasing power being turned into the system, and this particularly in the form of capital expenditures. The obvious remedy, therefore, is for central government to measure the amount of this aggregate deficiency and restore the Nation\’s business to a satisfactory state of activity by injecting an appropriate amount of the purchasing medium.  …

In discussing these polar extremes, the CEA report tried to stake out a middle ground, saying that \”it is with the 100-percenters or the 90-percenters that we disagree.\”

\”In contrast to the Spartan business theory and practice that carried a cult of individual self-reliance to the point of brutality and needless waste, we believe it is not fanciful to liken this doctrine of an overall offset to managerial maladjustment to the Roman system that swung to an extreme opposite to that of Sparta. Roman citizens were—for a time— relieved of the compulsion of relying on their own efforts to keep their economy as a desirable level. \”Bread and circuses\” were provided for all through the power of the state. Similarly, this theory relieves businessmen of the necessity of themselves making the business adjustments by which they would keep the system going at a satisfactory level. As we found in the Spartan school of thought, it is with the 100-percenters or perhaps the 90-percenters that we disagree. Extremists of the Roman doctrine says that we need not worry about any maladjustments in our enterprise system. Monopolistic price policies may curtail markets and cause unemployment. Excessive wage demands may drive costs up and paralyze profits, investments, and employment. We do not need to worry because we can always create full employment by pumping enough purchasing power into the system. If there is too much demand for labor and materials—that is inflation—we turn the faucet off and cause a contraction. Thus by manipulation of Government expenditures and taxation, continuing full employment is assured, and we do not need to worry about anything else in the economy.

\”Although American thought has largely been of the Spartan pattern of self-reliance, not without some of the brutally wasteful accompaniments of laissez faire, and although the softer Roman philosophy of external salvation has been aggressively sponsored in recent years, we believe the great body of American thinking on economic matters runs toward a more balanced middle view. This view stresses the importance of having the specific wage-profit-investment-disbursement relationships soundly adjusted at the points where business is actually done, markets found, and jobs created. …

\”For the actual operation of the major forms of business, we need the intimately informed and flexible decision making of private individuals in their business relations and of executives of business organizations. But we must recognize also that the practically sound and individually efficient management of private farming, manufacturing, transportation, distribution, and banking in the practical situations in which the active managers must make their decisions will not, year in and year out, add up to a sustained and satisfactorily stabilized total utilization of the Nation\’s resources in producing the national well-being of which we are in fact capable. Hence experience and experimentation teach us that there is an important area of Government action in stimulating, facilitating, and complementing the enterprise of private business even if individually well managed.  This functional differentiation and cooperation between private enterprise and public enterprise is in our view something quite different from and much better suited to our situation and temperament than the nationalization of industries to which our English cousins have now resorted. Nor does it involve that regulation of actual business operation which would constitute bureaucratic \”regimentation.\” 

Along with the more modern view of government macroeconomic policy that the report summarized as when government is either \”pumping enough purchasing power into the system\” or \”we turn the faucet off,\” the CEA report also emphasized the importance of consultation and communication that between \”the most thoughtful and responsible leaders\” representing business, labor, consumers, and various levels of government. Such consultation sounds a little strange to my modern American ear: perhaps naive, or old-fashioned, or European, or all of those. But that doesn\’t mean we couldn\’t do with more of it. Here\’s the 1946 report:

We believe, therefore, that when the Congress instructed the Council of Economic Advisers to set up consultative relations \”with such representatives of industry, agriculture, labor, and consumers, State and local governments, and other groups as it deems advisable,\” this outlines one of the major features of our work and one of the most important ways in which we may prove of aid in creating and maintaining conditions of maximum employment and the high standards of living that go with it. By consulting with the most thoughtful and responsible leaders of these groups with reference to conditions which would promote the welfare of the country as a whole, we believe that our counsel and advice on the national economic program will reflect a realistic grasp of the needs and difficulties of the several factors in the total economic process. We trust also that in the course of these consultations we may reflect back to the leaders of these groups something of the demands that successful operation of a total system make upon each of its component parts. In particular, we trust that we may translate objectively to the representatives of the various business, labor, and agricultural groups the purposes and methodology of the Government programs so that, instead of blind opposition which might arise through misunderstanding, there may always be constructive criticism, which will lead to useful adaptation.

Leave a Reply