If you like to make lists, mark economists "out" and businessmen "in" during the Reagan adminstration. Reaganites have come to suspect economists and the computer printouts on which most of them rely. And in any case, they are more comfortable with businessmen than with PhDs who come out of academia. In particular, the Council of Economic Advisers, symbol of the economists' heyday in the 1960s, could come a cropper.
Interestingly enough, Reagan is getting advice along these lines not only from his own inner circle, but from two bright young men in the exciting Carter administration. In a plain-speaking book titled "Memorandum for the President," Ben W. Heineman Jr. and Curtis A. Hessler show where Carter and his economists went wrong -- and how Reagan might avoid the same pitfalls.
On the critical issue of the economy -- to which Reagan gave priority attention in his inaugural address -- Heineman and Hessler say that Carter's disarray evidenced itself in "the zigzagging and uncertain approach . . . to the stark crisis of inflationary expectations." The former Rhodes scholars and assistant secretaries blame Carter's costly flip-flops on two factors: first, miscalculation of what was really going on in the economy and, second, politics.
Take the problem of miscalculation: the authors fault Carter's Council of Economic Advisers for relying too heavily on private econometric "models," which kept sending out wrong signals throughout 1978 -- and even into 1979. The models predicted slack in the domestic economy and largely ignored the impact of international commodity and currency markets. For all of 1979, for example, Carter's and most private economists confidently forecast the onset of recession. Embarrassingly, it didn't show up until last year, and then did nothing to reduce inflationary pressures.
Therefore, David Stockman, Reagan's director of the Office of Management and Budget, it is learned, plans to develop a government "model" or system of economic analysis at OMB, relying less on outside advisory services -- and promises to place only limited faith in any computer printouts, including his own.
"Very often," Heineman and Hessler say in their memo to Reagan, "you can get a better feel for the likely consequences of policy options by talking to sophisticated businessmen, labor leaders and financiers who have an informed, unscientific intuition about the workings of and interconnections between the many markets that make up the U.S. economy."
This strikes a responsive chord among the Reaganites. They would divorce the Council of Economic Advisers from a major voice in setting macroeconomic policy, assigning it instead various microeconomic tasks. Over last weekend, the job of council chairman was offered to Murray Weidenbaum, assistant Treasury secretary during the Nixon administration. If he accepts the post, as appears likely, the natural concentration of the CEA will be on deregulation of industry, which is Weidenbaum's specialty.
It will said that the CEA chairman is a full-fledged member of the Reagan economic team. But some will be more equal than others. Above the CEA chairman in the real pecking order will be Treasury Secretary Donald Regan, White House aide Martin Anderson and OMB Director Stockman. Some outsiders -- businessmen and a few business-oriented economists -- will also be influential.
All of the harsh Heineman-Hessler critique of Carternomics reviewed here so far comes under their heading of "miscalculation," which they say kept the administration tied over-long to a stimulative policy. Under the other cause of disarray, "politics," they assemble the later errors of omission and commission triggered by Carter's unsuccessful effort to keep the old Democratic Party coalition together.
Toward the end of 1978, Charles L. Schultze and the other Carter economic advisers knew that inflation was worse than they had guessed at the start, and some bold steps were necessary. But politics then rendered economic advisers impotent. Tight money would cause recession and more unemployment. Fiscal restraint, Reagan style, would cause sharp reductions in Democratic-initiated social programs. Tax cuts to stimulate busines investment were logical, but resisted by the labor-left wing of the party, which continued to stress public works.
What is Reagan advised to do? In assessing and analyzing economic problems, Heineman and Hessler tell the new president, first, to rely less on economists and their mathematical equations and more on businessmen in touch with real live financial markets. That will come to Reagan as easy as breathing, but -- witness the plight of the auto industry -- faith in captains of industry surely is no foolproof formula for success.
The second piece of advice from Heineman and Hessler is mushier: "You will have to create," they tell Reagan, "a powerful new constituency for making the necessary long-run sacrifices, because all existing constituency groups will fight you." This, as they concede, may be impossible. My columning-colleague George Will, as good an interpreter as any of how Reaganites think, already confesses to a recurrent nightmare: when budget cuts are finally delivered to Capitol Hill, "you'll find 535 liberals up there."