Martin Feldstein, President Reagan's nominee for Chairman of the Council of Economic Advisers, yesterday lambasted supply-side "extremists . . . who predicted that inflation would be reduced without raising unemployment."
Feldstein said the economy "seems about ready to recover" but warned it should not grow too fast or inflation will be reignited.
Democrats assailed Feldstein in his confirmation hearings yesterday for his views on housing, Social Security and the economy. One accused him of being another rich Reagan adviser who may be insensitive to the needs of less well-off Americans.
In testimony outlining his economic views, Feldstein said:
* What "I want is a sound recovery, not an excessive one" which might rekindle inflation by bringing unemployment down too fast. "It is extremely important . . . to avoid overstimulating the economy as it enters the recovery."
* Interest rates may rise temporarily with economic recovery but "the effect of the high rates will be to dampen the recovery and not to end it."
* Even after the economy recovers, unemployment will remain "uncomfortably high, probably between 6 and 7 percent" because of "important structural problems in the labor market" which should be faced by the government.
Concentrating on the need for more capital investment was "the essence of supply side economics," but "it is most unfortunate . . . that this idea . . . got a bad name when the label 'supply side economics' was attached to some extreme rhetoric about self-financing tax cuts and to euphoric forecasts of a painless transition to rapid but inflation-free growth." These forecasts have been "decisively proven wrong," he said.
* More incentives for savings and business investment are needed in order to increase capital formation and boost long-term growth. While he said "I am not anti-housing," Feldstein also said that if the proportion of gross national product which goes to investment remains steady, then "we're devoting too much of it to housing." Compared to housing, "U.S. investment in plant and equipment has been pathetically low," Feldstein said; "if we had more capital, we could afford" the current level of housing.
The Social Security system faces long-term problems which can only be solved by higher payroll taxes, a slowdown in benefit increases, or a combination of the two. Feldstein, who has been critical of the Social Security system in the past, said after the hearing that he favored changing the cost of living adjustments (COLAs) so benefits rise automatically by two percentage points less than the Consumer Price Index, rather than by the full amount of the CPI increase.
* Fiscal and monetary policies are not in conflict, as many analysts have argued, but "between the two of them" the economy is "moving towards lower inflation and higher productivity." Tight monetary policy has been "the driving force" in reducing inflation and interest rates, he said.
* Deficits are still too large. Congress and the administration must "find ways to reduce the projected deficits without . . . inappropriate tax increases, without hurting the poor . . . and without weakening our potential capability for national defense by unwarranted reductions in military outlays." Saying "I certainly hope we're going to be able to deal with the problem without any further tax increases," Feldstein told reporters he no longer supports delaying the third year of Reagan's 1981 income tax cuts.
Feldstein, a professor of economics at Harvard and president of the prestigious National Bureau of Economic Research, is extremely highly regarded in the economics profession and is expected to raise the level of economic analysis and advice within the administration. He is considered a very conservative economist, but within the mainstream of the profession.
His predecessor, Murray Weidenbaum, was criticized for having little weight with the president and a limited influence on economic policy making. Feldstein said he has met Reagan five or six times in the two weeks since he came to Washington, and expects him to be present at a meeting today of the Cabinet Council on Economics where Feldstein is due to review the economy.
Feldstein told reporters he had "brought in a number of very good people" to the CEA and expects the council to play a greater role in economic policy making. "The council will coordinate the forecasting activities of the Treasury and the Office of Management and Budget," he added.
Sen. Donald Riegle (D-Mich.) attacked Feldstein fiercely in an exchange centering on Feldstein's confidential financial statement. After the economist said his net worth was somewhere between $750,000 and $1 million, Riegle showed him a copy of the statement which listed Feldstein's personal wealth at more than $1 million. Feldstein apologized for "not remembering" the higher figure. A senior official later said Feldstein's wealth was calculated at $1.2 million, including some money in trusts for his children.
Feldstein was also unable to answer when Riegle asked him what his utility bill was in mid-winter. The senator said that worried him, as it may mean that Feldstein would have limited sympathy for others facing large bills.
Feldstein refused to take a position on the controversial constitutional amendment to balance the budget, which Reagan endorsed.