" . . . There can be no doubt that government policies . . . deserve substantial blame for the adverse economic experience of the past decade."
Those words, written in 1980, put economist Martin Feldstein firmly in President Reagan's camp. Many of his other views are similarly in accord with the president's.
Reagan's nominee to be chairman of the Council of Economic Advisers has a brilliant academic record and is held in high esteem by the rest of his profession, even by those who disagree strongly with his views. Feldstein is a prolific writer, publishing a large number of academic papers every year in addition to newspaper articles and testimony for delivery on Capitol Hill.
According to fellow Harvard economist Otto Eckstein, Feldstein, 42, was far ahead of the rest of the field in a recent count of which economist was credited most often in footnotes to other people's work.
As president of the National Bureau of Economic Research, an independent economic think tank, Feldstein also has demonstrated that he is an effective manager. According to Joseph Pechman, director of the Brookings Institution, Feldstein "more or less revolutionized the NBER overnight" by changing the direction of the bureau's research and assembling "a group of outstanding" and productive young economists, some of whom may follow him to Washington.
Lawrence Summers, described as a clever young economist who has worked on public finance, already is scheduled to join Feldstein, one Harvard economist said.
Herbert Stein, CEA chairman under Richard Nixon, and Alan Greenspan, Gerald Ford's chairman, have welcomed Feldstein's appointment, as have many other economists, although those less conservative than Feldstein naturally have their reservations.
Asked whether Feldstein had improved the NBER, Pechman said "improving is a word I can't use because I happen to disagree" with many of Feldstein's policy conclusions.
Eckstein described Feldstein as "a giant in the field" whom the administration is "lucky to have." But he also said Feldstein has "said some pretty shocking things" on social issues and "is not very preoccupied with the human side of things." Feldstein "kind of scares me" by his conservative position on many issues, Eckstein said.
Feldstein has argued:
* In favor of tax incentives to promote savings and investment.
* For a cutback in Social Security benefits, which he argues have reduced severely the amount of saving in the economy.
* For a reduced government role in the economy.
* That the nonrecession level of unemployment has been boosted by government benefits for the jobless, for whom the cost of being unemployed has been "often extremely low."
* That "if the inflation rate is above its optimal level, the economy should then be deflated to reduce the inflation rate, regardless of the temporary consequences for unemployment."
* That business investment should be encouraged at the expense of housing, and consumption.
As head of the Council of Economic Advisers, Feldstein will be more concerned with overall economic policy and forecasting than with micro economic issues, his area of expertise. He is neither a monetarist nor a Keynesian, colleagues say, but has supported tight money policy as a way of fighting inflation.
Indeed, he was one of the few economists who advocated the mix of tight money and easy fiscal policy that now characterizes Reagan's economic program. It is this policy mix that has led to high interest rates, other economists say, which in turn have pushed the economy into recession and kept it there.
Feldstein believed that if there were sufficient tax incentives for business investment, the high interest rates that would result from a tight money policy would choke off housing and spending on consumer durables rather than business capital spending.
However, Feldstein now has joined other experts who believe that the huge budget deficits now in prospect as a result of Reagan's initial tax cut bill and projected defense buildup are damaging the economy. At the meetings of the American Economic Association at the turn of the year, he argued for a postponement of the third year of the individual income tax cuts, due in July 1983.
Although the president himself has made his first major policy reversal -- in lobbying for a $98.9 billion tax increase over three years -- he has refused to budge on the third year tax cut. Feldstein is likely to be grilled on this in his confirmation hearings. He has declined to talk to the press since the news of his appointment.
Senators also are likely to question him closely on his views about Social Security, where he has been the "single most active person" in research according to Henry Aaron of the Brookings Institution.
As Reagan has discovered, it is politically dangerous to call for cuts in Social Security. Feldstein has argued vigorously for such cuts, however, on the grounds that Social Security payments discourage savings, slowing investment and damaging economic growth.
Other experts strongly dispute this argument, which has landed Feldstein in an academic controversy. His original research work, published in 1974, contained a technical mistake that some economists believe invalidates Feldstein's argument that savings have been significantly affected by the Social Security system. Although the debate still rages, "I don't think Feldstein has persuaded the profession that he's measured it the relationship between Social Security and savings correctly," Pechman said last week.
Aaron agrees. But "the conventional view" on the need to cut back Social Security, "is now closer to Marty's," he adds.
Feldstein is likely to push this view strongly within the administration, where senior officials already believe there will have to be cuts in Social Security and other entitlements next year, sources said.
He also is likely to be a "very effective advocate" on Capitol Hill and elsewhere for the further cuts in federal spending that Reagan has said he will propose next year, one congressional aide said last week.
Even among those who disagree with him, there is little doubt that Feldstein will improve the intellectual quality of the administration, both on his own account and because he is likely to attract more bright economists into the government.
"He's much smarter than anyone else floating around Washington," said one Capitol Hill staffer who knows Feldstein's work. "Probably the best economist under the age of 50 or 60," remarked Eckstein, who said Feldstein "has the promise of being the greatest chairman since Walter Heller" in the early 1960s.
But what is less certain is whether Feldstein will be able to use his undoubted ability to improve Reagan's economic record.
Feldstein comes to Washington at a time when prolonged recession, rising unemployment and stubbornly high interest rates are undermining the faith of even some administration insiders in the Reagan economic program, and when there is a decided lack of consistent high quality economic advice and analysis in the administration.
His nomination is seen in most quarters as a decisive move by the White House toward mainstream conservative Republicanism and away from the sharp conflicts between doctrinaire supply-siders and monetarists that have plagued the administration so far.
Reagan officials "need a strong guiding hand in their economic policy making," said Heller last week. "We all know what disarray there's been," he added, saying Feldstein should be "a force for more reason." The new CEA chairman could "develop a more plausible Reagan position," Eckstein said.
This is less likely to be aimed at stimulating demand in the economy to lift it out of recession than at bringing policy more into balance by cutting the deficit, one Washington economist said.
Even with this summer's tax bill, more deficit savings will be needed next year, Reagan has said. Many experts think that this at least will require further policy shifts from the president, perhaps including a scaling back of defense spending.
Feldstein's ability to promote such adjustments -- or, in Heller's words to move toward a "consistent and sensible" but still conservative economic policy -- will depend on his standing within the administration and most importantly with the president.
"I just don't know how well the decision-makers know and trust him," commented House Budget Committee Chairman James Jones (D-Okla) last week. "My impression is the decision-makers don't give much quarter to economists."
However, Feldstein probably would not come to Washington without assurances that he will be allowed a full policy-making role. And of all the various candidates for the job, he is most likely to be able to persuade the president, Heller said.
"He will out-argue everyone," another economist agreed.