Dr. Gloom vs. the Good-Time Guys

By Evan Thomas

In a week of rosy economic news, Feldstein 's warnings rouse ire

For the nation, the economic news last week was all good. Unemployment was down sharply in November, to 8.4%; the Dow Jones industrial average hit an alltime high. Around the country, retailers reported booming Christmas sales, and the leading economic indicators were up for the 14th consecutive month, the longest sustained recovery since 1975-76 (see ECONOMY & BUSINESS).

But at the White House, the upbeat mood was marred by some nagging warnings from an in-house Cassandra. For weeks, Martin Feldstein, chairman of the President's Council of Economic Advisers, has been cautioning that unless taxes are raised to cut the nearly $200 billion deficit projected for fiscal year 1984, the good economic news will turn sour. Moreover, Feldstein has been sounding off in public. Irked, the President's senior advisers tried to muzzle him last week with a public reprimand, which then degenerated into gratuitous ridicule. Their heavyhandedness succeeded only in drawing attention to Feldstein's message.

The White House, once worried that the recovery would run out of steam by mid-1984, is now confident that it will last at least long enough to get Ronald Reagan reelected. "The economy is coming up roses right now," chortled a Reagan aide. "Eighty-four is safe, and most think that '85 will be safe. As the good times move forward, there is less and less fear of the bubble breaking, at least before November." In fact, the President's political strategists are eager to make an issue of the economy.

The good news strengthens the hand of Feldstein's chief rival for the President's ear on economic matters, Treasury Secretary Donald Regan. "The President thinks Don Regan's advice is better. Don not only tells the President what he likes to hear, but it turns out he was right," says an aide. What Regan tells Reagan is that the President can cut taxes, increase military spending and still have a sustained economic recovery. Regan won a round earlier this year when Feldstein drastically underestimated the strength of the recovery, earning himself the nickname "Dr. Gloom." More recently Regan has been battling with Feldstein over the deficit. The CEA chairman argues that excessive deficits will drive interest rates high enough to choke off the boom. Regan insists that there is no hard proof of this. Even if the deficit persists, he argues, the White House can afford to wait until 1985 to reduce it.

As Feldstein sees it, the White House must act quickly--in the 1985 budget that it will present in January--to reassure the financial markets. Already the markets are betting that high interest rates will soon push inflation, now running at less than 5%, toward double digits. For the short term, however, most Wall Street analysts are more bullish than Feldstein. If anything, consumers are more confident. Retail sales are running 20% over last year at some stores. Says Richard Thomas, president of First Chicago Corp.: "When people are not worried about losing their jobs, they are more relaxed about spending their money."

Over the long term, though, many economists share Feldstein's concern about deficits. The so-called pragmatists among the President's aides, including Chief of Staff James Baker and Budget Director David Stockman, once privately conceded that taxes should be raised. But when it became clear that the President was dead set against any increase and Congress was unlikely to force one in an election year, they wanted Feldstein to shut up. His refusal to do so, they say, only frightens Wall Street, provides the Democrats with political ammunition and hardens Reagan's intransigence on taxes. Charges one aide: "Feldstein is a damn loser. He has the worst sense of politics of anyone you ever saw."

When Feldstein did not respond to private hints, Press Secretary Larry Speakes was instructed by top aides to let reporters know that the economist was out of step. Asked at a press briefing if Feldstein was speaking "too much," Speakes mildly joked, "Too often and too much." When reporters laughed, Speakes let the high jinks continue, alternately pronouncing Feldstein's name "steen" (incorrectly) and "stine" (correctly). The press secretary first announced that Feldstein had been excluded that day from an economic policy lunch. Told that Feldstein was in fact present, Speakes joked, "Maybe he won't make it to dessert." Admitted a White House aide: "The thing got a little out of hand in the pressroom." Aides said the President was furious at Speakes.

Undaunted, Feldstein continued to call for a tax hike in a speech only hours after the Speakes briefing. But Feldstein later told TIME, "I have no desire to be fired." He used economists' jargon to announce that he would adopt a lower profile. "Seasonally adjusted," he quipped, "I'll still be out here, but we're coming into a lay-low season." Feldstein is due to return to the Harvard economics department next September.

Feldstein insists that "the only tax increases I've pushed are those contained in the President's own 1984 budget." Indeed, it is true that Reagan himself last year called for a "standby tax" to go into effect if the deficit still remained high at the end of 1985. But Reagan was never really serious about pushing for the tax. For the 1985 budget, the President's men may demand dramatic spending cuts from Congress and call for a constitutional amendment requiring a balanced budget. The balanced-budget amendment is widely considered to be unworkable, not to mention totally hypocritical, coming from an Administration that countenances $200 billion deficits, and Congress is as unlikely to cut spending as it is to raise taxes. The huge deficits will be left alone for at least another year. In the meantime, the Administration wants to let the good times roll. --By Evan Thomas. Reported by Laurence I. Barrett and David Beckwith/Washington

With reporting by Laurence I. Barrett, David Beckwith/Washington This file is automatically generated by a robot program, so viewer discretion is required.