The President's Economic Report

Abstract

T here are a number of things about this year’s promised to transform the making of macroeconomic Economic Report of the President that give me pause. Is it really true that the U.S. economy today enjoys “excellent health,’’ as the Report says it does? Structurally, it has too many weaknesses to warrant that description; cyclically, it looks to me more lacking in vitality than a really healthy economy would be. But, putting these differences aside, one must admire the Council of Economic Advisors’ courage in choosing as the central theme of this year’s book the question of how macroeconomic policies should be “designed.” I doubt that what the Report has to say will prove to be the last word on this sensitive and much battered subject, but it has made a good try to that end. It would be helpful if the Council were more specific on what it thinks is right in the design of policy, but at least it is clear on what it thinks is wrong. What it thinks is wrong is a policy that leaves a wide scope for “discretionary” action. It is the old question, so dear to strict monetarists, of rules versus authority, with the Council coming down solidly on the side of rules. As an example of what it doesn’t like (and this will ruffle many feathers), the Council cites the ”full employment budget” concept (later the “high employment budget”), featured in the 2962 Economic Report and widely admired at the time as absolutely the last word on the shaping of economic strategy. Derived from the Keynesian synthesis, the theory proposed a framework within which the policymaker (if clever enough) could devise the neatly calibrated adjustments in tax and expenditure programs that would move the economy to full employment. It ( policy from art to science. At least it would make it largely arithmetical. It didn’t work, says the Council; furthermore (invoking ”recent economic research and practical experience” in support of its argument), nothing like it can ever work because 1) economic forecasting is too inexact and unreliable, 2) even if it were possible to make accurate forecasts, it is difficult to tell what policy would be right for what the forecaster foresees, and 3) leads and lags are such as to make whatever is done ultimately ill-fitting and untimely. As I read this, and I am not disposed to quarrel with it, it says, among other things, that “fine tuning” is a snare and a delusion, likely to do more harm than good. What, then, is the alternative? According to the Report, the alternative is “systematic” policy, meaning policy that is “designed to work well with a minimum of discretion, with a clear focus on the longer term, and with allowances for future contingencies.” Policy in this mode ”specifies, as clearly as possible, u plan for the instruments of poZicy, be they the Federal budget, the growth rate of the monetary aggregates, or tax rates.” (Italics are in the original.) Obviously, the Report warns, systematic policy must be well designed, may need to be revised occasionally, and may require judgment in its administration. But it has the advantage over discretionary policy in that it “places some discipline or general guidelines on future changes in the policy instruments.” If the public believes that the plan will be implemented, and ”acts on those beliefs even in the face of occasional contradictory evidence,” it (the 77