Dr. Feldstein's facts squeeze Reagan as political '84 warms
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Martin Feldstein won't keep quiet about the budget deficit, and they don't like it upstairs at the White House. The chairman of President Reagan's Council of Economic Advisers may be fired, though his statement of support for the President's program, Wednesday, has apparently saved his job for now.Skip to next paragraph
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What led Dr. Feldstein into trouble is a series of speeches pointing to budget spending trends and the hefty federal deficit. His numbers aren't being challenged, but they do imply - though Dr. Feldstein doesn't say it in so many words - that growth in defense spending and debt costs are a major factor behind the deficit. This is embarrassing because the White House has been trying to blame Congress for the deficit.
There is plenty of good economic news, of course. Inflation is running at a low level. Unemployment has come down faster than anticipated. The recovery is far stronger than most economists - including Dr. Feldstein - predicted. The leading indicators for October, released by the Commerce Department Wednesday, indicate the recovery will continue.
But the deficit won't go away, and the White House is wondering about Mr. Reagan's political vulnerability on this score. The Democrats may point out that the President originally promised to eliminate the red ink no later than in the fiscal year ended Sept. 30.
Further, Dr. Feldstein has been saying that the deficit will remain huge without further spending cuts or tax increases, or some combination of these. He usually mentions the tax increases called for by the President in this year's budget proposal.
In the meantime, the President has decided that prior to the 1984 election he doesn't want any tax increase. Thus the White House doesn't appreciate Feldstein's emphasis on contrary policy in a manner that may be taken, also, as ''official'' government policy.
For instance, in the text of a speech Feldstein delivered to the Tax Foundation in New York Wednesday, he said: ''Although no one likes an increase in tax rates, I am convinced that the advantages of reducing the budget deficit outweigh the disadvantages of the proposed increase in tax rates.''
Feldstein, who by assignment is President Reagan's top economic adviser, takes the economic damage from the deficit more seriously than do other Presidential advisers, such as Treasury Secretary Donald Regan. The actual differences in their views of the deficit, however, may be less than publicity suggests.
Most economists agree that the huge deficit - something under $200 billion - can be financed in the coming year without seriously crowding private borrowers out of the capital market. They are more concerned with later years, say 1985 or 1986, when the economy is running closer to full capacity.
Feldstein, an economist on leave from Harvard University, wants to see the deficit tackled now rather than after the election. Those in the White House, eyeing the election year, have different priorities. He maintains the deficit is creating a ''lopsided recovery'' because, for instance, it has resulted in high interest rates, which attract money from abroad, which in turn strengthens the value of the dollar and discourages exports.
His data tend to surprise some of his audiences, particularly since President Reagan continues to whip Congress for not cutting civilian spending enough:
* ''Between 1980 and the current (1984) fiscal year, real government spending on all domestic activities except social security and medicare will actually have fallen by nearly 10 percent. This real four-year decline, which includes outlays for everything from so-called 'entitlements' programs to the administrative costs of running government departments, is . . . unprecedented.''
During each of the preceding four-year periods since 1960, he added, this spending rose between 11 percent and 38 percent, even after adjusting for inflation.
This reversal of the pattern means total spending on these domestic government activities will be $230 billion less in the three fiscal years from 1984 through 1986 than it would have been if there had been no change in the share they took of the nation's total output of goods and services, that is, its gross national product (GNP).
Moreover, under the laws now on the books, the spending share will decline from 7.7 percent of GNP this year (down from 9.3 percent in 1980) to only 6.3 percent of GNP by 1988, or back to the level of the 1960.
* Defense spending, on the other hand, rose from 5.3 percent of GNP in 1980 to 7.7 percent of GNP in 1988. By comparison, defense spending was 8.1 percent of GNP in 1970 and 9.1 percent of GNP in 1960.
* Net interest paid by the government will increase from 2 percent of GNP in 1980 to 3 percent in 1988, even if the rate of interest on Treasury bills declines from the current level of nearly 9 percent to less than 6 percent by the end of 1988.
Noted Feldstein, ''Unfortunately, a substantial share of the budget savings achieved by domestic spending will be absorbed by the rapid rise in interest on the national debt.''
Some economists might quarrel with the accuracy of the economic assumptions behind some of these numbers, such as the rate of inflation or the amount of economic growth, but not their basic thrust.
Enjoying tenure at Harvard and independent financially, Dr. Feldstein does not need his White House job. What he cannot afford is damage to his reputation for intellectual integrity. If he is fired, he would probably get back another position as president of the prestigious National Bureau of Economic Research, an organization that prides itself on its ''scientific'' approach to economics.