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 Feb. 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
Thus, whenever Democrats proposed big federal spending programs
to reduce unemployment, 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 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
4-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 CBO. They found Dan Crippen, a lobbyist who had long worked
for Sen. Howard Baker, R-Tenn., the former Senate majority leader and White
House chief of staff.
With Crippen, Republicans thought they had gotten an economist
who also understood politics. Unfortunately, Crippen did little to change
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
Seeing the handwriting on the wall, Crippen said that 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
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 No. 1 choice for the job.