Knowledge that Transforms

This paper traces the changing role of the Council of Economic Advisers. In the 50 years since its creation, the CEA's focus has shifted from the design of policies to achieve full employment to one of advising on the much-enlarged spending and tax activities of the federal government. The CEA's original attention to achieving cyclical stability through fiscal policy diminished as economists changed their views about the inherent stability of the economy and the usefulness of fiscal policy. With the shift of macroeconomic policy to the Federal Reserve, the CEA's macroeconomic role has diminished but not disappeared. The rapid growth of government spending during the past five decades has greatly increased the role for the CEA in seeking efficient resource allocation.

Economists working in developing countries often advise the governments that policy reform is a necessary condition for realization of potential growth. The governments generally agree but often argue that must be introduced slowly, and one or a few at a time rather than comprehensively within a short period as in a stand-by arrangement with the IMF. Yet, as Robert J. Barro and Xavier Sala-i-Martin (1995 p. 8) have noted, there is surprisingly little empirical evidence on the relationships between specific policy reforms and growth. The research underlying this paper seeks to join this issue by identifying empirical regularities in the movements of real per capita GDP growth and five measures of economic policy. The proposition examined is that periods of stagnation or decay of per capita GDP will be longer and more severe, the greater the departure of policy from norms such as those outlined in John Williamson's now famous Washington consensus. We focus specifically on Western Hemisphere Developing Countries (IMF classification) over the period 1961-1993, and we rely on IMF International Financial Statistics and World Bank Indicators CD-ROMs for the data. We have been influenced by the nonparametric approach taken in Michael Bruno and William Easterly's (1995) study of relationships worldwide, between price inflation and growth before, during, and after episodes of exceptional price inflation. Their results include a generally robust pattern in which growth of real per capita GDP falls substantially during the episodes of high inflation and then rises to rates above even the pre-episode rates. These findings conflict with those of cross-section studies that have found no robust relationship between growth rates and rates of price inflation. Bruno and Easterly's interpretation of the difference is that parametric cross-section and linear time-series regressions are unsuitable for detecting the relationship between high inflation and growth. Similar reasoning seems to argue for nonparametric tests of the relationship between good policy and good growth performance. Arguably, monetary expansion rates (or fiscal deficits, foreign-exchange flows, or investment/GDP rates) can be very different among countries with similar growth rates. Historical patterns and regularity of these variables may be as important as their magnitudes.

Anniversaries inspire retrospective reflections. In turn, retrospective reflections frequently generate scholarly publications. I should like to comment briefly on scholarly enterprises recognizing Irving Fisher at three moments in time. Though each is different, each throws significant light on aspects of Fisher's prolific career as well as on the nature of our discipline. The first anniversary benchmark dates from 1937 and marks Fisher's 70th birthday. This took the form of Festschrift entitled The Lessons of Monetary Experience. The 14 contributors, as editor Arthur D. Gayer explained, were aware of the wide range of topics to which Fisher had made original contributions. They had decided, however, that it would be most useful to structure the Festschrift around a single topic of leading importance. In the environment of 1937, the salience of monetary issues was not in doubt. Fisher himself-with his persistent calls for reflation, then stabilization of the general price level-was in the thick of contemporary debate on these matters. So also were the contributors, whose ranks included Marriner S. Eccles, John H. Williams, Alvin H. Hansen, James Harvey Rogers, R. G. Hawtrey, and John Maynard Keynes. The essayists, it will be noted, were not all like-minded. Though they shared high regard for Fisher's contributions to the discipline, few of them were in complete accord with Fisher. The purpose of this anniversary exercise was to stimulate and sharpen professional understanding of problems of first importance to the nation's economic health. In view of the priority he attached to solutions underpinned by scientific findings, Fisher was obviously comfortable with this approach, even though it meant that many of his other career achievements went unattended. A tribute to Fisher of quite different sort appeared in 1967 on the occasion of the 100th anniversary of his birth. All but one of the essays then appearing in volume entitled Ten Economic Studies in the Tradition of Irving Fisher (William Fellner et al., 1967) were written by members of the Yale economics department. (The exception was centennial appreciation prepared by Paul Samuelson.) The resulting publication was organized on the following principle: authors were to select topic to which Fisher had made an original contribution and to extend the analysis he had offered to embrace the state of the art in the mid-1960's. The broad sweep of Fisher's inventiveness as contributor to the economist's tool kit was on display here. For example, Fellner took note of Fisher's contribution to utility theory and his attempts to devise statistical method to measure marginal utility; Marc Nerlove addressed distributed lags, Fisherian innovation; Richard Ruggles used Fisher's work on the making of index numbers as point of departure; Herbert Scarf examined general-equilibrium modeling with attention to its Fisherian roots; James Tobin took note of the relation between Fisher's theories of saving and interest and more recent work on life-cycle saving and balanced growth; Henry C. Wallich examined contemporary controversies over monetary theory and policy against the backdrop of Fisher's restatement and amplification of the quantity theory. The 100th-birthday volume bore ample testimony to the continuing vitality of Fisher's analytic style in professional discourse. The contrast with the agenda set for the 70thbirthday Festschrift, it will be noted, could not have been more striking. The earlier publication focused on single topic of immediate relevance to policy, to the exclusion of all else. The later publication captured multiple dimensions of Fisher's professional pioneering, with emphasis on his innovations as theorist. These volumes reflected priorities of the profession at the time they were produced. * Department of Economics, Wesleyan University, Middletown, CT 06459-0024.