Martin Feldstein: A deficit prophet’s warnings are borne out

September 17, 2011

In 1961, Martin Feldstein faced a choice: Become a doctor — or an economist. He had finished his bachelor’s degree in economics from Harvard College and been accepted to Harvard Medical School. He went with economics, enticed by a Fulbright scholarship to study at Oxford University in England. The first paper he published was an economic analysis of Britain’s National Health Service.

When he returned to the United States in 1967, Medicare and Medicaid were just two years old. Feldstein says it was immediately clear to him their costs would rise rapidly.

“Our present system of financing health care provides inadequate protection, encourages inefficient use of resources and accelerates the inflation of medical costs,” Feldstein wrote in an article in the Public Interest, a journal of conservative thought edited by Irving Kristol. While that’s a warning a politician might have offered in the halls of Congress this past summer as Democrats and Republicans jousted over the national debt and government spending, Feldstein wrote it in 1971, when Richard Nixon was in the White House.

He was sounding the alarm decades before rising health-care outlays fully captured national attention. Health spending was 26.5 percent of the federal budget in 2010, up from 7.1 percent in 1970, federal data show.

Feldstein has helped shape conservative economics by sticking to a few principles: Shrink government spending, cut tax rates and be very wary of budget deficits. The first two were mostly embraced in the 1980s by President Ronald Reagan, whom Feldstein served for two years as chief economic adviser. The third, fighting deficits, proved to be more thorny, then as now.

Feldstein’s stance on balancing the budget got him on the cover of Time magazine in March 1984, although the words “Monster Deficit” took up more space than his picture. By that July, he was out of the White House, having clashed with Treasury Secretary Donald T. Regan, in particular.

While pointing out that the tax legislation Reagan signed in 1986 ultimately reduced deficits, Feldstein says the issue was contentious. “There were people in the administration, on the political side, who just wished that subject would disappear, that I would stop talking about it, that somehow the public wouldn’t notice it,” Feldstein says.

The public, and every politician in Washington, has noticed the deficit this year. Feldstein, 71, is still talking about it.

“He’s got a vast amount of experience and knowledge across a whole array of different topics, from tax policy to health care to macroeconomics to China,” says Peter Orszag, President Obama’s former budget director. “People listen to what he says.”

The Simpson-Bowles panel, when it completed its work last December, recommended raising government revenue by eliminating or restricting tax expenditures: deductions and credits written into the tax code for such things as mortgage interest and investments in renewable energy. Feldstein says reductions in tax expenditures were part of Reagan’s 1986 tax measure and should be included in any deficit fix today.

“There is literally more than a trillion dollars a year — a year! — of spending built into the tax code,” Feldstein said. “We could go after a large part of that.”

Feldstein, who wins praise for presenting economic concepts clearly, explains tax expenditures this way: “It sounds like a paradox. But if I buy a solar panel for my house, the government doesn’t send me a check. It gives me a tax deduction. But that’s the same thing as sending me a check. So that’s a kind of spending.”

Restricting tax expenditures could increase revenue without raising tax rates, Feldstein says. He has proposed that the benefit any taxpayer can get from deductions and exclusions be capped, perhaps at 2 percent of adjusted gross income.

In a twist, it’s Democrats who have been most open to the idea. Kent Conrad, the North Dakota Democrat who chairs the Senate Budget Committee, invoked Feldstein’s name in a floor speech on July 21 as he argued that the deficit can’t be tackled with spending cuts alone. Republicans in Congress wouldn’t agree to higher tax revenue of any kind during the debt-ceiling negotiations.

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