The MacNeil/Lehrer Report; Interview with Martin Feldstein

ROBERT MacNEIL: Good evening. There were more mixed signals on the state of the economy today. The Commerce Department at first reported that the index of leading economic indicators rose six tenths of a point in October, the sixth month in the last seven that it's gone up. Neither government nor private economists read that as a signal that recovery from the recession has begun. Then, late this afternoon, the Commerce Department said it had miscalculated; the index rose only two tenths of a percent. Economists were also watching predictions from the White House that federal deficits for this fiscal year might go as high as $190 billion. And eyes were also turned to this Friday when the monthly unemployment figures are widely expected to show that the jobless rate has again gone up. That may increase the pressure from Democrats in Congress for special legislation to create jobs, and resistance from the administration, which fears to make the deficit larger. In the face of stiff congressional opposition, President Reagan today dropped the idea of advancing the date of the 10% tax cut due in July. For whatever reasons, Wall Street registered its fourth biggest gain on record today. Tonight, to tell us how the administration reads these mixed signals, we have the President's chief economic adviser, Martin Feldstein. Jim Lehrer is off; Mr. Feldstein is with Charlayne Hunter-Gault in Washington. Charlayne?

CHARLAYNE HUNTER-GAULT: Robin, Martin Stuart Feldstein enjoys the reputation of being his own man. If he hadn't gone to Oxford on a Fulbright scholarship, he might be a medical doctor today, but that detour after graduating from Harvard led him to three different degrees at Oxford, including a Ph.D. in economics. After returning to Harvard as a member of the faculty, Mr. Feldstein underwent a metamorphosis, moving from mainstream Keynesian economics to the conservatism he continues to embrace today. Mr. Feldstein enjoys a blue-chip reputation even among liberal economists, who regard him as a good conservative. Prior to becoming the 13th chairman of the Council of Economic Advisers, Mr. Feldstein had rejected other offers to come into government. Since 1977 he had been president of the National Bureau of Economic Research, a prestigious, rigidly non-partisan group best known for deciding when the economy enters a recession or a recovery. At his confirmation hearing, Mr. Feldstein's criticism of extremists among supply-siders was among the comments that earned him that reputation for being outspoken and his own man. Mr. Feldstein, welcome.

MARTIN FELDSTEIN: Nice to be with you.

HUNTER-GAULT: Thank you. First, was it congressional opposition alone that caused the President to decide not to advance the tax cut, or did you have something to do with it?

Mr. FELDSTEIN: Well, the President had a lot of advice on a number of different aspects of it. He heard from me and others about the economics; he heard from leading members of Congress. He saw the thing in a perspective which included political and economic and the whole broad administration package, and as you know, he's decided not to change the tax cut but to stay with the full 10% tax cut in July.

HUNTER-GAULT: Well, I heard some of the members of Congress who were on this program last night describing why they were opposed to it, and Senator Dole described that he had advised the President against it because there wasn't support, he thought, in the Congress for it. From an economic perspective, what was your concern about it? Why was it a bad idea?

Mr. FELDSTEIN: Well, this is the kind of issue on which I think there could be reasonable differences of opinion, but I felt that the gains of moving the tax cut up in terms of stimulus were outweighed by the negative effects of increasing the size of the deficit.

HUNTER-GAULT: Okay, now, let's explain that in terms that are simple enough for me to understand.

Mr. FELDSTEIN: Okay. I was afraid that if we had a $15-billion additional tax cut this year we'd have an additional $15 billion of government borrowing. That would tend to push up interest rates; it would tend to worry financial markets about the future of the deficit. All of that would have an adverse effect on the economy in general; it would slow down the recovery; and it would certainly slow down the recovery in key industries like construction and housing and capital goods that are sensitive to the interest rates. So the simplest way to put it is, if we had had a larger deficit we would have less activity, less employment in all the industries that are sensitive to interest rates.

HUNTER-GAULT: All right. At one time you even, on the tax cut itself that's scheduled for July, were in favor of delaying that beyond July. Do you still think that's a good idea?

Mr. FELDSTEIN: No, I don't. No, I had that view last December --

HUNTER-GAULT: When you were a Harvard professor.

Mr. FELDSTEIN: Back in December of 1981 when I was a Harvard professor. But, more importantly, before the 1982 tax bill was passed. Remember, this year we've had a significant tax increase passed, or cut back on the tax reduction passed for 1982 and future years. And that did more than I then, back last December, thought was necessary. So once that happened, once we had the new tax bill in 1982, my ideas last December became moot because Congress had already moved beyond that.

HUNTER-GAULT: Do you think there is still some risk in doing it now in July?

Mr. FELDSTEIN: Oh, no. No, I think that the tax cut should occur now.

HUNTER-GAULT: And you're expecting that -- just by way of refreshing everybody's memory -- to do exactly what?

Mr. FELDSTEIN: I think that what that's going to do is to provide the third year of the three-year package. It's going to bring down rates across the board by 10%, and it's going to mean that everybody faces lower tax rates and has more take-home pay. And that's, of course, a permanent change. It's going to give us permanently lower tax rates than we otherwise would have.

HUNTER-GAULT: All right, now, one of the things that you have continued to express concern about, and you just mentioned, is this large deficit, and today, as Robin indicated at the beginning of this program, the projection is now that it's going to be as high as $100 billion. Do you agree with those projections? Are they too optimistic, too pessimistic?

Mr. FELDSTEIN: The projections for 1983 -- while we can't be precise at this point, and there aren't any official administration projections -- I think it's reasonable to think that the deficit for 1983 is going to turn out in the $150- to $200-billion range, depending on exactly how the economy goes during the remaining months of this fiscal year -- very serious, large deficit.

HUNTER-GAULT: All right. Robin?

MacNEIL: Mr. Feldstein, what are you proposing to bring the deficits down?

Mr. FELDSTEIN: Well, it's not for me to propose, it's for the President to propose, and to do that in January in the budget. I think that it is very important that we get those deficits down, not in '83, but in '84 and '85 and in the years out into the future, that we get that deficit moving down very sharply.

MacNEIL: Well, looking at 1983, there seems to be growing pressure in the Congress, especially since the election, for some reduction of the rate of increase in the defense budget. Do you now accept some defense cut as inevitable?

Mr. FELDSTEIN: No, I certainly don't. I think that the President has been very clear that he doesn't want to see any reduction in the defense strength of this country, and I think that's something that's widely shared. I think there is a distorted perception of the magnitude of the increases in defense that the administration, the President, has asked for. People quote numbers in terms of hundreds of billions of dollars, and I think, frankly, none of us can get much of a feel for numbers of that magnitude. When I describe to people what the administration's defense spending program is, I like to do it in terms of the share of our national income, a share of GNP, that's going to defense. And if you take that in historic perspective, you can see that what the President's program is trying to do is to build our way back up toward, but not fully reach, where we were back in 1960. At that point we were spending about 9% of GNP on defense outlays. That's dropped down to under 6% in recent years, and it's now on its way back up. It's about 6% in the year that just passed, and the President's program will gradually build it back up to about 8% of GNP out in 1988.

MacNEIL: In making your calculations -- and I know they're not primarily political calculations; they're economic ones, but looking at them realistically -- does the administration, in your consultations there in the White House -- do you really think that you can get a budget out of the next Congress without paring that rate of increase in defense expenditure somewhat?

Mr. FELDSTEIN: Let me say, first, about the defense spending, that I think no part of the budget can be exempt from very careful examination. I think that the defense budget and all other parts have to be looked at very carefully, are being looked at very carefully within the adminstration to see what kind of savings are possible. The more political question that you asked, about how Congress is going to respond, I think is really outside my area of expertise, and I'm going to leave that to you, to others, to decide how Congress is going to respond.

MacNEIL: Senator Dole, the Republican chairman of the Senate Finance Committee, says that domestic programs have been cut to the bone and probably can't be cut further in this effort to get the deficit down. Do you agree with him?

Mr. FELDSTEIN: I don't think they've been cut to the bone. I do think that some programs have been cut as much as they can be, as much as they should be cut. I think other programs need to be examined. Again, I think the best way to think about it -- the way, at least, I find myself thinking about it -- is to look at it in some kind of historic perspective: where have we been? where are we now? In 1960 we were devoting about 9 1/2% of GNP, of national income, to non-defense spending. By 1970 it was up to about 12 1/2%; now it's about 18%. So if we were to move that percentage of GNP -- not the actual number of dollars, but just a share of our growing GNP -- back in the direction of 1970, we could do an awful lot to shrink this very large deficit that we now face.

MacNEIL: What programs are you looking at where you think cuts can still be made?

Mr. FELDSTEIN: I'm afraid I really can't answer that until the administration's budget comes out. I would say, though, that we are looking very broadly at the entire budget to see what kinds of savings can be made.

MacNEIL: Is it fair to say that the main effort to get the deficit down from the administration's point of view will be in cutting domestic programs?

Mr. FELDSTEIN: Domestic programs are 75% of the budget, so I think it is fair to say that the administration's main efforts in bringing down the total deficit will be concentrated on that 75% of the budget.

MacNEIL: Well, thank you. Charlayne?

HUNTER-GAULT: Mr. Chairman, can we get back to trying to clarify some of those mixed signals that Robin talked about earlier? What's your reading of whether the recovery from the recession has actually begun?

Mr. FELDSTEIN: I don't think we can say with any certainty at all about whether the recovery has begun. I think what we know is that October was substantially lower than September. Will November be above Octoer? Will October turn out in retrospect to have been the trough? We just don't know. There are mixed signals. What I find reassuring is not the picture of where the economy is in October -- which are the most recent figures we have -- but the direction that the economy is moving, all the signals about the future. And I think there the evidence is getting stronger and stronger that a recovery is building.

HUNTER-GAULT: Well, what is the evidence?

Mr. FELDSTEIN: Well, the leading indicators are a good example. I think Robin said six out of seven. In the last month, this statistical index, which tends to move up several months before production and employment and sales turn up, that's been going up.

HUNTER-GAULT: But this one this time seems to be small. Is that a misreading of that?

Mr. FELDSTEIN: No, it's a number that bounces around. It's a weighted average of a whole bunch of individual statistical indicators. We expect to see it bouncing around a bit. Last month was up very strongly. But I don't want to put a lot of emphasis on the precise size of this. I think the qualitative picture is that it's been rising month after month. Housing is probably the strongest part of the existing upturn. Housing starts are running about 30% above where they were a year ago; and probably more indicative of where things are going, housing permits -- the authority to start new housing -- are up 33% just since August.

HUNTER-GAULT: And what do you think that's a result of?

Mr. FELDSTEIN: Lower interest rates are the principal thing, and I think growing confidence. I think people are reluctant to start building, reluctant to make commitments to buy unless they feel the economy is turning around. The consumer confidence surveys that are done also show that consumers are more confident about the future, do believe that the lower interest rates and easier credit make this a better time to buy than it was before.

HUNTER-GAULT: But haven't the retail sales been very low this year compared to the pre-Christmas and post-Thanksgiving shopping of previous years?

Mr. FELDSTEIN: It seems to be very mixed. Some of the stories we've had about what's happening on durables, especially those durables associated with housing, represent good news. I saw some stories in the paper that this last weekend represented a sigificant improvement relative to the same weekend last year, the Thanksgiving weekend. So I think there is some good news in those figures.

HUNTER-GAULT: But also there seems to be some concern on the part of the public as they look at the unemployment rates and so on to kind of hold back. I mean, don't you need real consumer confidence manifested in consumer spending in order to spur this recovery?

Mr. FELDSTEIN: And we are beginning to get that. I said something about housing. If you look at autos, autos have also been coming up month after month, and the first three weeks of November have looked better than earlier months. You're right about consumer confidence being an important part of it; the psychology of the consumer is critical. But of course, the consumer can't get his judgment about where the recovery is going from the unemployment rate because we know that that begins to turn down only a couple or three months after the recovery has actually begun. So historically consumers have started spending before the unemployment rate comes down. And I think we are beginning to see that now in housing and autos and other things.

HUNTER-GAULT: Well, historically, just to return to those leading indicators for a moment, the increases that we have been experiencing over the past few months, aren't they smaller than those that preceded previous recoveries?

Mr. FELDSTEIN: I think the month-to-month absolute size of them may be smaller, but we've had a longer run of them, so cumulatively -- frankly, I haven't made the calculations -- but cumulatively we may have had more of an increase, or we may not. I just haven't done the calculations. But I think we clearly have these indicators in place, and of course, if you look at what the private forecasters are saying, they're all saying that 1983 is going to see a higher level of economic activity than 1982.

HUNTER-GAULT: And what are you saying in terms of -- I know you're saying it's difficult and everything, but I mean, if you had to hazard a guess as to when --

Mr. FELDSTEIN: I would hazard a guess that '83 is going to be -- in fact, I'd do more than that. I would assert strongly that the level of real economic activity in 1983 is going to be above that of 1982.

HUNTER-GAULT: And is that going to mean the early part of '83 -- January, February, March?

Mr. FELDSTEIN: No, that's too tough. That's too tough. I think economists fool themselves and fool the public if they pretend that they can say which month or even which quarter an economy is going to turn around or just how fast it's going to grow in any single quarter. There's too many uncertainties.

HUNTER-GAULT: Where does your hope lie? Tomorrow?

Mr. FELDSTEIN: We'd all like to see the recovery start yesterday.

HUNTER-GAULT: All right. Robin?

MacNEIL: You've been quoted, Mr. Feldstein, as saying you don't want too strong a recovery. What does that mean?

Mr. FELDSTEIN: I want a recovery that is sustainable. I want a recovery that is non-inflationary. I'm afraid that if excessive pressure to stimulate the recovery were to be put in place, in particular, if the Fed were forced or chose to provide too much monetary expansion, we would see a short spurt, a growth, but we would see inflation heading up, and we would soon see the recovery peter out. And that would be very unfortunate.

MacNEIL: We'll come back to the Fed and monetary policy in a minute. What do you expect the unemployment figures to show on Friday? Do you, as others, widely forecast that there'll be a further increase shown in the rate of unemployment?

Mr. FELDSTEIN: I think there's likely to be. What we have had in the last several weeks has been improving numbers on the new claims for unemployment insurance, but I'd be surprised if, when the dust settles, we don't see at least a small increase in the unemployment rate. Basically because the unemployment rate tends to turn down only after we've been two months or so into the recovery.

MacNEIL: And what do you expect the average rate of unemployment to be next year, in 1983?

Mr. FELDSTEIN: It depends so much on when the recovery begins. If the recovery begins in this final quarter of this year, then we'll see the unemployment rate trending down all during next year. So it might start at 10.5, 10.6, and be gradually working down during the year. But if the recovery is postponed by three months, then the unemployment rate will keep rising, and it will start down from a higher level. That's what makes it difficult to say whether the average is going to be 10.3, or lower or higher.

MacNEIL: You've also --

Mr. FELDSTEIN: Whatever it is, it's going to be an unfortunately high number.

MacNEIL: Yes, I was going to come to that. You've also been quoted as saying that even if there is a recovery that the country is going to have to live with a high rate of unemployment for a number of years. Could you just briefly tell us how you see, even with optimum conditions, how you see it improving?

Mr. FELDSTEIN: Yes. I think that the basic problem, as I said, is that we have come through a period of rising inflation year after year to a point where in '79 and '80 we had 12 and 13 percent inflation. And we're now in a process of bringing that down, and that takes a long period of time, and inevitably causes a great deal of unemployment and suffering. If we don't want to re-ignite inflation, then we have to bring the economy back up slowly. We have to bring the unemployment rate down slowly and the level of real activity up slowly. And it's for that reason that I see the economy getting back to an unemployment rate of six to seven percent only after five years or so. I think that is very unfortunate, but I think it's the consequence of the kind of long period of inflation that we are finally working our way out of.

MacNEIL: Is the administration going to remain adamant in resisting any attempt to create a jobs program?

Mr. FELDSTEIN: Well, I won't speak for the administration on that. I think it would be a mistake to have what is popularly called a jobs program. I think if we have a big public works, public spending program, we will transfer jobs from one part of the economy to the other, and we'll actually risk making total employment fall if we increase the size of the deficit by a so-called jobs program, we will see higher interest rates, and that will depress housing and construction, capital-goods industries, and in general will have an adverse effect on the economy. So I don't like to see that called a jobs program.

MacNEIL: Thank you. Charlayne?

HUNTER-GAULT: All right, what about the thing the President's calling a highway program that, really, some people see as a jobs program?

Mr. FELDSTEIN: It's a highway program.

HUNTER-GAULT: I mean, it will hire people, but you've expressed some opposition to that as well.

Mr. FELDSTEIN: No, I thought it was a good program as a highway program. You don't have to spend much time on the highways to discover there are a lot of potholes out there and there are a lot of bridges that need repair. But I think it has to be seen as a bride and highway program and not as a jobs program. Yes, it will create jobs in the construction industry, but on balance, for the economy as a whole, it is not seen as a jobs program.

HUNTER-GAULT: You said it will create jobs in the construction industry, but will it also create unemployment as well, this one?

Mr. FELDSTEIN: Not in the construction industry, but basically it will expand employment in the construction industry, but it will reduce employment in other places in the economy. And on balance it should be seen, it should be valued as a plan dealing with roads, bridges, highways, and not as a job-creation program.

HUNTER-GAULT: Well, if we continue to have the rates of unemployment that you've just talked about -- eight and nine percent -- and if every, what is it?, 1% of unemployment costs the government some, what?, $20 to $30 billion in taxes and revenues, unemployment benefits and welfare and so on, I mean, how can you be against a jobs program if you're going to spend that amount of money on the other side?

Mr. FELDSTEIN: Because it won't bring down the deficit; it'll make the deficit larger because the government will be spending money to hire those people. It will be spending more money than is created in terms -- remember, to bring down the unemployment rate by 1%, you have to hire more than a million people. If you hire more than a million people, you're not going to be improving the budget deficit.

HUNTER-GAULT: I see. What about structural unemployment -- people who have been unemployed because of plant closings -- plants that will never open, or black teenagers who don't have the skills to hold jobs --

Mr. FELDSTEIN: I think that's critical, and I think when we talk about where the unemployment rate is going, and this notion of bringing it down to the six- to seven-percent range, which is currently what I call the inflation-threshold level of the economy, we're not yet addressing the problem of structural unemployment. I think structural unemployment, the groups that you mentioned, the plant closings, the young person who's looking for a job, the person who has been out of school for a few years and still hasn't found an appropriate job with relevant training -- I think those are serious problems, and they keep this structural, or inflation-threshold level of unemployment up there in the six- to seven-percent range. It's not always been that high, and I don't think it should stay that high, and I think we should be, and indeed the administration, as you know, is considering policies which will bring that down. Now, the jobs training bill that was passed earlier this year is just such a bill.It is aimed at structural unemployment, both training for the disadvantaged, and especially the young, and retraining for people who have found that their industries are shrinking.But I think we should be going beyond that, and I think that's where the critical, long-run unemployment problem is.

HUNTER-GAULT: All right. Robin?

MacNEIL: Mr. Feldstein, there was another jump in the money supply last week, and yesterday interest rates began moving upwards again. Some economists are beginning to express fears that the sudden growth in the money supply will restart inflation. Do you share that fear?

Mr. FELDSTEIN: No, I don't. I think the game of looking at the weekly money supply figures is very misleading. I think that the Fed -- if you look at the Fed over the last three years, it's very clear what the Fed has done.It has gradually brought down the growth of the nominal money supply. It has assisted in bringing down the rate of inflation. But if you take any week -- or indeed, any month or even three months -- it's very hard to tell that from the statistics. And I think it's unfortunate that the financial markets end up putting so much attention on week-to-week numbers.

MacNEIL: Let me ask you this. The recovery is elusive, as you've said. There is a lot of report of different points of view within the administration. There is certainly some rising political concern in the Congress about the state of the economy. Does the -- I don't mean this impertinently, but does the administration now know, and has it decided what it's doing, or is it still trying to find out what it should do about the economy?

Mr. FELDSTEIN: I think the administration knows what it's doing about the economy. I think it has had a long-term plan for getting the economy moving.It included bringing down personal tax rates. It included providing incentives for people to save more and for businesses in invest more, and a strategy for bringing down the rate of inflation. And I think it is basically sticking with that long-term policy.

MacNEIL: And it is not improvising?

Mr. FELDSTEIN. What's the difference between improvising and innovating? There are from time to time new policies, but I think that basic thrust is there.

MacNEIL: I see. Well, I think that's the end of our time. Thank you very much for joining us, Mr. Feldstein, this evening.

Mr. FELDSTEIN: Nice to be here.

MacNEIL: Good night, Charlayne.

HUNTER-GAULT: Good night, Robin.

MacNEIL: That's all for tonight.We will be back tomorrow night. I'm Robert MacNeil. Good night.