Reagan sidesteps Feldstein in backing jobs program
With unemployment above 10 percent, Washington feels a great political need to be seen as doing something to provide jobs.Skip to next paragraph
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President Reagan decided Tuesday to go along with the pressure, endorsing a 5 -cent-a-gallon raise in the gasoline tax to help pay for repairs of the nation's highways and bridges and to assist urban mass-transit systems.
Only the day before, in an interview, Dr. Feldstein spoke of the drive for the jobs program as ''natural clamor.''
The chairman of the Council of Economic Advisers has been stating his opposition to the various proposed job-creating programs forcefully. ''I don't think we want to go with the kind of public-works program I hear people talking about on the Hill,'' he said.
He opposes the $5.5 billion program for two reasons:
1. The administration, Congress, and the Federal Reserve System have already instituted policy changes to bring about a recovery.
2. The program could actually increase the number of jobless for a year or so.
Dr. Feldstein's expectation of recovery, perhaps by year-end, is based on the boost in incomes resulting from last summer's 10 percent cut in personal income taxes, the decline in inflation, and the drop in interest rates. On Monday major banks trimmed their prime rate - the interest they claim to charge their most creditworthy customers - half a percentage point, to 11.5 percent.
The former president of the National Bureau of Economic Research explained that as inflation has come down, the real growth of M-2 - a measure of the nation's money supply that includes currency in circulation, private checkable deposits, savings deposits, and money market funds designed for individual investors - has become positive. Real growth is measured after subtracting the inflation rate. When this was done in early 1981, the real growth rate was negative.
''Now real M-2,'' he went on, ''is the stuff from which real economic growth comes from.''
Usually nominal growth in the nation's output of goods and services about matches the nominal growth rate of M-2. Sometimes in the early stages of a recovery, the growth rate of gross national product can exceed the growth of M-2 , as so-called ''velocity'' - the turnover of money - increases unusually.
In the second quarter of this year, M-2 grew at a 9.5 percent seasonally adjusted annual rate. In the third quarter it grew at a 9.7 percent rate, and in the latest month of these figures, October, at an 8.1 percent rate.
With inflation currently running somewhat below 5 percent, that means there is room for 4 or 5 percent real growth in GNP in those M-2 numbers. That pleases Dr. Feldstein.
Moreover, he adds, the personal tax cut was sufficient to offset the tendency of inflation to push taxpayers into higher tax brackets. He doesn't expect that tax cut ''to do miracles for the economy.'' Nonetheless, he maintains, ''We have the conditions we need for a recovery.''
Already, he notes, there has been an increase in housing starts and in some spending on consumer durables. And the leading indicators remain up. But he anticipates a recovery that he describes as ''sound, . . . modest, slower than most recoveries, . . . sustainable.''
As for the jobs program, his objection is that it could be counterproductive. Suppose, he explains, Congress boosts gasoline taxes to pay for a jobs program. That $5 billion will come from consumers; they will have that much less money to spend; that lower spending will slow down the creation of new jobs in those areas affected by lower consumer spending. The only question is whether spending by consumers or spending by Congress would create more jobs. Economists have done complex econometric studies to attempt to resolve that issue, without a clear answer. In any case, the difference in job creation, one route or the other, would be minor.
Alternatively, the government does not boost the gasoline tax, but enlarges the budget deficit by spending on a jobs program anyway. This, Dr. Feldstein said, would mean the federal government would have to finance that $5 billion in the money markets. This could boost interest rates and crowd out private borrowers - again costing jobs.
In either case, because of the time needed for the government to crank up a jobs program, the immediate impact could be fewer jobs, he added. Economics would be hard pressed to say whether a jobs program would produce more or less jobs in the long run.
Whatever scientific economics may say, the pressures on Congress to be seen as taking action on unemployment are strong. On Monday, House Speaker Thomas P. O'Neill, a Massachusetts Democrat, and Senate majority leader Howard H. Baker Jr., a Tennessee Republican, agreed to press in the postelection session for the President Reagan.
''Our first priority must be to put the millions of unemployed back to work, '' Mr. O'Neill said.
That may be his feeling, but Dr. Feldstein and many other economists aren't sure whether such a program might instead boost the number of jobless. The President has made his decision, however, and Dr. Feldstein will have to live with it.