As the new boy on the block, Martin Feldstein, chairman of the Council of Economic Advisers, is fully aware that his influence in the shaping of policy will depend on the relationship he strikes up with President Reagan -- whom he really didn't know before his appointment.
Feldstein, a Harvard-trained conservative economist highly regarded by his peers, liberals as well as others, is serving in his first government job. He prizes his blue-chip reputation, and intends to take it back to academia intact. That seems to be understood by presidential assistant Ed Meese, who approached him on the CEA job, and by everyone else in the White House.
At his confirmation hearing Sept. 22, Feldstein didn't hesitate to say that some "extremists" among both supply-siders and monetarists had predicted at the start of the Reagan administration that inflation could be reduced without raising unemployment, and "have been decisively proven wrong." This testimony was not only a tribute to him, but to the White House, which cleared it in advance.
Nonetheless, Feldstein feels that it was absolutely critical to get inflation and inflationary psychology under control, and that this has been done by the administration and the Fed faster than anyone -- himself included -- had expected.
But now, Feldstein thinks that the economy is ready to move forward. In his view, the economy is "in transition" from its depressed status of high unemployment and low capacity utilization, to one in which a recovery should be beginning.
The nation needs to follow policies that will lead to a "steady, sound recovery, but that don't run the risk of being inflationary," Feldstein said in an interview in his high-ceilinged office across the street from the White House. It's the same one where CEA chairmen ranging from liberals Walter Heller, Arthur M. Okun and Leon Keyserling to conservatives Herbert Stein, Raymond Saulnier and Arthur F. Burns have held forth.
Feldstein doesn't exhibit the pessimism prevalent in many business circles. He's convinced that the economy will recover because the necessary stimulative force has already been set in place by last year's personal and business tax reduction.
In addition, he judges that the Fed is now following a policy under which the money supply is growing modestly faster than the price level -- and he expects that to continue next year. So he sees enough fiscal and monetary thrust to move the nation out of its slump, yet not so much as to re-ignite inflation. What would scare him would be an effort to pump everything up, in a worldwide return to Keynesian expansionism -- the medicine recommended by economist Lester Thurow.
To those who find it difficult to see where economic recovery is going to come from, Feldstein cites "a little bit of everything." He places a lot of hope in lower interest rates (including the first signs that mortgage rates are beginning to edge down).
He is known to feel that the recession has masked the beneficial effects of the tax changes made last year. He believes these will stimulate capital formation by encouraging individuals to save (through devices such as IRA accounts) and by providing new business investment incentives.
"This was a positive, good policy," designed to encourage higher rates of investment in plant and equipment, Feldstein said. He pointed out in his testimony that for the past 15 or 20 years, real net private investment in plant and equipment had been "pathetically low" -- no more than 3 percent of the gross national product.
In seeking out Feldstein and the kind of staff he could attract, the administration clearly has decided to enhance the status of the CEA, which fell to a low point in the past year, even if it has to make a bow in the direction of the more traditional right-of-center Republican establishment, and away from far-out supply-side or monetarist ideology.
Although liberals respect Feldstein's brains and integrity, they worry about his general philosophy. They have special concern about his long-standing argument that the Social Security system has detracted from the ability of the economy to generate private savings. Whether Feldstein will be able to push this pet theory remains to be seen.
At the moment, he is going to great lengths to listen politely to everybody. This past week, he took the unprecedented step of soliciting a meeting at the Fed with the five Federal Reserve Bank presidents, who, along with the seven-member Federal Reserve Board constitute the policy-making Federal Open Market Committee.
These five Fed presidents, he concluded, have a regional appraisal of economic conditions, free of industry bias, that would be invaluable to the CEA. He has held similar meetings with academic economists, financial market analysts, and a group of industrial chief executive officers.
Intuitively, Feldstein knows "the danger of being inside the compound here," relying only on official sources of information. Will he have the president's ear, and exert a real measure of influence? Check this space again in about six months.