Carter economist raps Reagan on magic of market

Can the free market, left to itself, weave a magic spell to awaken America's slumbering economy? Or is it a mere mortal whose operation sometimes benefits from government's helping hand?

Ronald Reagan, with his emphasis on prying government off the backs of the people, believes the less federal intervention in the market, the better. A key economic adviser to former President Carter disagrees.

''(President Reagan) has a supreme belief in the magic of the market,'' says Dr. Lawrence R. Klein. ''I think there are many cases when you can do better outside the market.''

Dr. Klein, now a professor of economics at the University of Pennsylvania, was Jimmy Carter's chief economic counsel during the 1976 campaign. He won a Nobel Prize for his pioneering work in econometrics, which uses mathematics to analyze how the economy behaves. Interviewed at a conference on supply-side economics sponsored by the Atlanta Federal Reserve, Klein had a stack of brickbats to throw at President Reagan's economic policies.

For one thing, he says the administration oversold its program. It promised too much, too soon, Klein claims, and were misled by their own optimistic forecasts. Rosy deficit predictions masked the approach of bad economic weather and undermined Wall Street's confidence in the program.

''A lot of the trouble is, they overdid the PR,'' Klein says.

He criticized the President for ''experimenting'' with the economy - for basing public policy on theories backed up by little academic research.

''The Laffer curve is a joke,'' he says, referring to the claim by economist Arthur Laffer that money lost through marginal tax cuts can be offset by increased revenues from a booming, newly unshackled economy. Initially, some administration officials invoked the Laffer curve when peddling last year's tax cut before Congress.

Dr. Klein claims the tenets of Reaganomics should have been subjected to the scrutiny of scholarly meetings, learned journals, and general academic argument before being made the law of the land.

He also says the administration can't see the trees for the forest - that it only considers the economy as a whole and doesn't see that it must be fixed piece by piece. Instead, Klein recommends what he calls ''industrial policies,'' government efforts to help particular parts of American business.

In other words, government should give the free market a little added assistance, instead of simply looking the other way. Instead of being ideologically opposed to such meddling, says Klein, administration officials should see that such policies have been a great help to countries like Japan.

''(The Japanese) aren't supermen,'' he says. ''If they can do it, we can too.''

Speaking before the conference, Klein proffered some ''industrial policies''

* Tax breaks. The administration's accelerated depreciation allowances are all well and good, Klein said, but there should also be larger investment tax credits and more federal support for R&D. To open the taps of venture capital wider, capital gains might get more favorable treatment, escaping taxation if they are quickly reinvested in another new enterprise.

* Human capital. Klein recommends skill training for youth, beyond CETA-type programs - perhaps in an effort shared by the public and private sectors.

* ''Picking of winners.'' Many countries give promising industries special treatment, says Klein, and the US should too. Besides the obvious choices of microelectronics and its many progeny, he suggests more prosaic fields such as agriculture and coal technology, where the United States has a ''natural advantage.''

* Stockpiles of raw materials. Besides filling the strategic petroleum reserve, Klein suggests the stockpiling of other crucial goods such as cobalt.

* Emphasis on exports for industrial growth, as Japan has practiced.

Klein's audience, mostly businessmen and bankers who paid $550 a head to attend the two-day conference, did not react warmly to suggestions for a larger government presence in the marketplace. They applauded far longer for another Nobel Prize winner, Milton Friedman, the short, tan, feisty guru of the free market.

To mend the economy, Dr. Friedman said during a luncheon speech, ''the absolutely essential condition is a reduction in the size of government.''

He thinks his friend and advisee Ronald Reagan is taking the right path.

''The triumph of the policy Ronald Reagan has been following is that he is making (Congress) talk seriously on his terms,'' Friedman said.

The President's policies will effectively jump-start our stalled economy. ''Nothing else will do it,'' he said.