Of all the problems assailing the American economy -- inflation, productivity lag, energy shortages, big government, lack of confidence in the government -- the "first and most urgent" is inflation, Milton Friedman, the economist and Nobel laureate, contends -- "particulary," he says, "the inflationary and unstable monetary policies the Federal Reserve Board has been following the past year."
The Federal Reserve, America's central bank, is the villain, "because it deserves very serious criticism," declares Dr. Friedman, who regularly attacks the agency's leadership and its policies.
The outspoken University of Chicago economist, a senior research fellow at Standard University's Hoover institution, is among President Ronald Reagan's key economic advisers. Mr. Reagan has visited Hoover for briefings for years, the institution serving as a counterpart to the more liberal Brookings Institution, which has long served Democratic presidents.
Friedman's most recent book, "Free to Choose," written with his wife, Rose, also an economist, rode high on the 1980 best-seller lists, while a 10-part TV series with the same title completed a second run on public television. Friedman picked up his Nobel Prize for economic science in 1976.
He said that he is "pessimistic for the short run and optimistic for the long run," assessing the current US economy in an interview. He defines the short term as the next year or two years.
"The US, after all, has very serious problems. But those problems are not a defect of the economy. America has a very strong economy, very wealthy," Friedman stresses. The defect arise from bad government, and the cure for the nation's economic woes is "a dose of good government," he maintains.
Whether the US will continue as a haven for a heavy flow of foreign investment will depend on the nation's policies. "If we follow the kind of policies I hope we shall follow, the US will not only remain a good place for foreigners to invest, it will become a much better place for foreigners to invest. I would expect the US to be a very, very much favored location for foreign investment," he says.
Persistent inflation has revived interest in restoring the gold standard in the US, with two bills toward that end proposed in the 1980 session of Congress. Passage of such legislation has hardly any chance, however, in the economist's view.
"Whether it's good, bad, or indifferent, we're not going to get it [a gold standard]," he insists. "There is no government in the world that's willing under current circumstances to submit itself to the discipline of an honest-to-goodness real gold standard."
Friedman intends to take no official position in the Reagan administration. "I expect to play the same role I've played for years -- as an outside gadfy with, I trust, the ability to talk to friends of mine who are in the government."
The advice he will offer Mr. Reagan is what he's been saying all along, that the crucial ingredients of a successful economic policy are to cut governmnet spending, reduce marginal tax rates, establish a stable monetary policy, let the markets work, and drastically reduce regulations in every area, particularly regarding energy.
Friedman finds that a president has a great deal of influence in the US, but not much power. "The president alone cannot do a great deal, but that's why the election of a Republican Senate majority is more important than what happened to the president. And the president, plus the Congress, can do a great deal," he says.
Friedman believes the US is still in a recession and never recovered from the 1980 slump. "What we had was a temporary bubble on a recession produced by an extraordinarily inflationary monetary policy over the second half of 1980. The growth in money supply has been more rapid than in any other six-month stretch in the post-World War II period. That," he snaps, "I consider a disgraceful performance."
He argues that the US faces a grim choice: "Do we have a recession now as a side effect of curing inflation and then get into a situation where we can have both healthy growth and no inflation, or do we have a recession later as a result of not curing inflation and have to go through it all once again in a more severe way?"
There's no shortage in America of doomsayers warning that the nation is heading for an economic slowdown as bad as the 1929-33 depression, or worse. Friedman does not share that gloomy outlook.
"The people who are preaching this gloom-and-doom philosophy are pointing to valid problems adn to trends that do exist, but then they're carrying a good thing much too far," he comments.
"I don't believe there's any chance whatsoever -- short of a major or third world war. That, of course, would mean all bets are off. But short of that, there's no chance we will either have a real explosion of hyperinflation or have a major depression.
"I gave a talk in Sweden in 1954 entitled 'Why the American Economy is Depression-proof,'" Friedman recalls. "That was 27 years ago. I haven't been wrong so far, and I don't see any reason to change that view."