The Administration's Dr. Gloom

By Alexander L. Taylor III

Martin Feldstein loses friends by warning about deficits

The setting last week was a session of the House Budget Committee, and the subject was deficits. Peering from behind his oversize tortoise-shell glasses, Martin Feldstein, the scholarly chairman of the Council of Economic Advisers, patiently explained once again the harmful impact on the U.S. economy of a succession of $200 billion deficits. Finally Michigan Democrat Howard Wolpe asked: "What on earth does the Treasury Secretary say to you when you lay out these arguments?" Feldstein laughingly replied: "I think you'll have to discuss the Treasury Secretary's views with the Treasury Secretary. You can't get two for the price of one today."

As the good-natured answer indicated, Feldstein, who favors raising taxes in order to reduce the deficit, is tiptoeing through the minefields of economic policy. He has become the target of whispers and leaks from Administration loyalists trying to undermine his already shaky standing with the White House. Presidential aides recently forced him to decline an invitation to appear on Meet the Press on the ground that it would highlight internal policy differences. A staff member on his own council leaked a story that Feldstein had been forced to alter two speeches and "throw away" a third one because of White House censorship. Top Administration officials have been hinting that Feldstein, who plans to return to his teaching post at Harvard next September, should quit sooner.

Feldstein insists that there is little truth to all the stories. In an interview with TIME last week, he said that changes in the two speeches were minor and that the canceled address will be rewritten and given later. Further, he notes that his compliance with a well-publicized White House order that his speeches be reviewed before delivery is voluntary. Asked about reports of his imminent resignation, Feldstein combatively replied: "I know there are people who would be happy to see me back in Cambridge. I'm not going to give them the satisfaction. The President isn't well served unless he gets honest advice from his advisers."

Feldstein's leading antagonist within the Administration has been Treasury Secretary Donald Regan, cheerleader of the "deficits don't matter" school of economic thought. Regan strongly opposes increasing taxes in order to bring down the deficit. While that view has few adherents in the business or academic world, it has many advocates in the White House. The notion of a tax increase before next year's election is anathema to Reagan's political advisers.

In addition to pushing unpopular programs, Feldstein has undermined his credibility with a series of inaccurate economic forecasts. Last January he projected that business would grow only 3.1% this year. That low forecast earned him the nickname "Dr. Gloom." He has since revised that figure an embarrassing four times, and now predicts that the G.N.P. will increase 6% to 6.5% this year. Says one White House observer: "This record reinforces Reagan's tendency to disregard the doomsaying of economists generally and to follow his instincts instead."

The newest area of conflict for Feldstein and Regan is the 1985 budget, which will be submitted to Congress in late January. Budget Director David Stockman has already begun presenting the over views of his 1985 proposals to the President. In his Capitol Hill appearance last week, Feldstein warned that inaction on the $200 billion deficits that are anticipated would "probably produce" a recession in 1986.

So far there is no sign of such a downturn. Last week the Government announced that the index of leading economic indicators advanced .9% in September, the 13th consecutive month of increase. To keep the economy growing, Regan wants to cut taxes even further. The Treasury Department is currently working up a proposal that would lower the capital gains tax by reducing the holding period needed to qualify for the reduced tax from one year to six months.

Since only Regan's message seems to be getting through to the White House, even Feldstein's friends think he is fighting a quixotic battle. Says Rimmer de Vries, chief international economist at Morgan Guaranty Trust: "Marty is lost in the political shuffle in Washington."

Feldstein's quandary is not an unfamiliar one. Thirteen men have held the job of chairman of the Council of Economic Advisers since Congress created the post in 1946, and many of them have had troubles combining academic objectivity with political reality. Feldstein's predecessor Murray Weidenbaum was earnest but in effectual and served mostly as a mediator between White House factions. He resigned 15 months ago in frustration.

Nonetheless, Feldstein has some powerful allies within the Administration. Commerce Secretary Malcolm Baldrige and Trade Representative William Brock also favor raising taxes. Budget Director Stockman is getting ready to lobby hard within the Administration for tax increases as part of his plan to bring down the 1985 deficit. Stockman argues that the Administration is unlikely to get many more new cuts in social programs and should accept some tax increases. One idea is to reintroduce the "contingency tax," which the President put into the 1984 budget but never formally proposed. This would trigger an increase in taxes if the deficit for fiscal 1986 exceeded 2.5% of gross national product. The deficit is now about 6.1% of G.N.P. Another plan is to propose a consumption tax, such as the value-added tax, in place of the contingency tax.

Despite the White House's unhappiness about the dire predictions of "Dr. Gloom," Feldstein shows no sign of changing his views. Said he last week: "The real problem is not this year, but the long-term future, as financial and business leaders see a string of unending deficits out into the future." That is a message the White House does not want to hear, and for now, at least, it is just not listening.

--By Alexander L. Taylor Ill.

Reported by David Beckwith/Washington

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