Two recipients of the Nobel prize for economics criticized President Reagan's economic program yesterday before the National Association of Business Economists in Washington.
Wassily Leontief - the founder of input-output analysis, a way of examining the relationship of various sectors of the economy - said that although change is necessary, "Changing in the direction of the 19th Century is not a very promising thing."
The administration's emphasis on free markets is overdone, he argued. Leontief, a member of the faculty of New York University, said the price system works like a computer, but like any computer needs watching over to make sure it does not break down or make an enormous mistake.
And Lawrence Klein of the University of Pennsylvania's Wharton School said that he does not think that the president's program is the only way to fight slow growth and high inflation, and that so far it does not look very successful anyway. Reagan's program could easily become an "orthodox" anti-inflationary plan of slowing down the economy for two or three years in order to combat inflation, Klein said.
This could be dangerous because it risks plunging the economy into a serious recession, he said, pointing out that other countries following such a policy have had serious problems. Klein did not mention Great Britain by name, but Margaret Thatcher's government there has pre sided over a massive increase in unemployment and a fall in real output while following tight anti-inflation policies.
Klein laid out a 10-point "dream" scenario for the economy in the 1980s, concentrating on measures to increase private saving and capital investment. He said that spending cuts of the size requested by the president are unnecessary, and the Federal Reserve's money policy is too restrictive.
Both economists described inflation as a complex problem, requiring more than a simple, one-dimensional solution. Leontief proposed an incomes policy as the only way to cope with what he called a social, and not a monetary, phenomenon. He argued that labor and capital should negotiate over the share of the total economy which goes to each rather than leave it up to the market.
Klein also said an incomes policy is a possible way of dealing with inflation. Any plan has to go beyond macroeconomic policy, which was doomed to fail, he said.
Klein said that the Federal Reserve's switch in operating technique nearly two years ago towards greater emphasis on direct control of money rather than interest rates was a bad idea, and had led to high interest rates, which are a problem for America and the rest of the world.