Politics & Policy

Budget Boost

Holtz-Eakin will move the CBO in the right direction.

Last week, Congress made an extremely important decision by appointing economist Douglas Holtz-Eakin as director of the Congressional Budget Office. He will take over on February 1.

The CBO is a small but extremely powerful government agency. It was created by the Budget Act of 1974 because Congress wanted its own analyses of the cost of federal legislation. Prior to that time, it was forced to rely on estimates produced by the White House’s Office of Management and Budget.

Congress thought (rightly) that giving OMB the final say on what new federal programs would cost boosted the president’s power over the budget. So it not only created the CBO, but also required that only its cost estimates were “official” when considering legislation.

Economist Alice Rivlin was chosen as first CBO director. As an editorial writer for the Washington Post, she had much to do with shaping the budget legislation. Now, she would have the opportunity to create a federal budget agency from scratch.

While Rivlin is a competent economist, she reflected the philosophy of her time. That philosophy was based on the theories of economist John Maynard Keynes. In the Keynesian model, spending is good, saving is bad, and monetary policy basically plays no role.

In 1974, when the CBO was created, most economists shared Rivlin’s Keynesian view. As a consequence, most of the economists hired to staff the agency were Keynesians. Moreover, most of the operational procedures adopted by CBO for evaluating federal programs were based on Keynesian theories.

Thus, whenever Democrats proposed big federal-spending programs to reduce unemployment, the CBO said these would work well, creating the maximum number of jobs per dollar of increase in the federal deficit. By contrast, when Republicans proposed tax cuts for the same purpose, it said that these were very inefficient because some of a tax cut might be saved. Hence, in the CBO model, the number of jobs created by a tax cut were much less than from a similarly sized spending program.

Republicans have long believed that the CBO’s operating procedures biased government policy in favor of more spending and against tax cuts. But for many years, there was nothing they could do about it. Both houses of Congress were controlled by Democrats, who appointed Rivlin to an initial four-year term and then reappointed her to another.

In 1982, Republicans finally had something to say about the CBO director because they controlled the Senate. Although a nominal Republican, Rudy Penner was appointed to the position. He made no major changes in either the CBO’s staff or operating procedures, which continued to be dominated by Keynesian assumptions.

In Penner’s defense, he was in a difficult position, with a Republican Senate and Democratic House. There probably wasn’t much he could do to change the organization. When he left in 1986, he was followed by two Democrats: Robert Reischauer, now president of the liberal Urban Institute, and Edward Gramlich, appointed by Bill Clinton to the Federal Reserve Board.

When Republicans took control of the House and Senate in 1994, they had an unprecedented opportunity to put one of their own in as CBO director. They chose June O’Neill. While O’Neill is an excellent economist in her field, she was not the sort of person who was going to shake up the CBO. And as a career academic, her political skills were seriously lacking. Republican congressional leaders were very dissatisfied with her and would have fired her if her term hadn’t run out.

In 1998, Republicans tried harder to find a director who would get control of the CBO. They found Dan Crippen, a lobbyist who had long worked for Senator Howard Baker (R., Tenn.), the former Senate majority leader and White House chief of staff.

With Crippen, Republicans thought they had an economist who also understood politics. Unfortunately, Crippen did little to change the CBO’s basic direction. Perhaps due to health and personal problems, he never exercised the leadership that Republicans hoped for. Indeed, toward the end of his term, Crippen was actively fighting “dynamic scoring,” which would incorporate macroeconomic effects into the revenue estimates of tax legislation.

Seeing the handwriting on the wall, Crippen said he had no interest in being reappointed CBO director at the end of his term last year. This has led to the appointment of Holtz-Eakin.

Holtz-Eakin is a highly respected public finance economist. He has a Ph.D. from Princeton and has been chairman of the economics department at Syracuse University for some years. Since early 2001, he has served as chief economist for the White House Council of Economic Advisers. In this capacity, he had much to do with shaping the tax plan recently proposed by President Bush.

In Holtz-Eakin, I think Republicans have finally found the right combination of economic skill and political sophistication they have been looking for in a CBO director. At the risk of besmirching his reputation, he was my Number 1 choice for the job.


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