Some final 'insider' forecasts from economist Feldstein
Packing boxes block a marble fireplace in the reception room, and a farewell color picture of his staff sits on a side table in his inner office as Martin S. Feldstein, President Reagan's controversial chief economist, prepares to return to academia.
Dr. Feldstein, who resigned in May, leaves the administration July 10. The next day, he, his wife, and two young daughters will be on their way back to Cambridge, Mass., where he will teach economics at Harvard University and serve as president of the National Bureau of Economic Research, the organization that declares the start and end of recessions.
No successor has been named, and Feldstein says it ''wouldn't surprise me'' if no one is named until after the presidential election.
The opinions and activities of the soft-spoken, scholarly economist, chairman of the Council of Economic Advisers, often jumped from the financial page to the front page. His persistent warnings about the dangers of large federal deficits provoked jibes from White House deputy press secretary Larry M. Speakes and an angry outburst before a congressional committee from Treasury Secretary Donald T. Regan.
Feldstein's unduly cautious forecast for economic growth in 1983 earned him the nickname ''Dr. Gloom'' among administration insiders. But in an interview Monday, the Harvard-trained economist offered upbeat views on a number of economic topics.
Like many forecasters, he says positive economic news is virtually assured through election day. And, unlike a growing number of private forecasters, he says he does not see a recession in 1985, and adds that his best guess is that the nation will enjoy a 4 percent real economic growth rate that year, although '86 will be ''a much more difficult year.''
Feldstein is also more optimistic than some private economists about the ability of major debtor nations - like Mexico, Brazil, and Argentina - to ''get appropriate amounts of credit voluntarily'' and pay interest on the debt they owe to United States and other foreign banks.
''It is a good possibility'' the situation can be worked out through boosting developing nations' exports, thus keeping banks from having to write off the loans, he says. Such a write-off could cause an upheaval in the US banking system. He cautioned that for smaller debtor nations, a solution that allows adequate credit and the ability to pay interest costs ''may be impossible,'' because the debts exceed the unspecified nations' ability to pay.
Feldstein's interest-rate forecast is less optimistic than that of his colleagues in the administration, but more upbeat than many private estimates.
Treasury Secretary Regan said recently that rates would ''shade down'' by the end of the year. Feldstein says he thinks medium- and long-term interest rates ''ought to show softening'' soon, as financial markets begin to analyze the effect of the recent deficit ''down payment'' passed by Congress and the prospects for additional action next year. He refused to provide a precise time frame for the expected decline in long-term rates.
Twenty-four private economists surveyed last week by the Wall Street Journal predicted that the rate on 30-year Treasury bonds would rise from the current 13 .64 percent level to 13.75 percent by year's end and to 13.89 percent by mid- 1985.
Feldstein is less optimistic about the outlook for short-term interest rates. There is ''no reason'' to expect them to fall, and short-term rates could rise, he says. The deficit and private borrowing, he says, are keeping credit demands high and thus making short-term rates firm.
That explanation contradicts President Reagan's statement last week that ''there is no excuse for interest rates being at the level they are right now, other than fear of the future.''
The private economists surveyed by the Journal see the rates on 90-day Treasury bills moving from their current 9.9 percent level to 10.62 percent by the end of 1984 and to 11.16 percent by the middle of next year.
While short-term rates will hold steady or perhaps increase as a result of market pressures, in Feldstein's view, he says he does not expect the Federal Reserve Board to tighten monetary policy at the meeting of the policymaking Federal Open Market Committee, scheduled for July 16-17. While some private economists expect the Fed to gently tap the brakes to slow the economy's strong growth, Feldstein says there is ''no reason for change'' in the Fed's current policy.
He says, however, that he expects the Fed to set lower targets for money-supply growth in 1985 at its meeting this month. But he says the targets will not be ''substantially different'' from the current targets, all but one of which the Fed is now meeting.
Feldstein's forecasts assume that Congress will take some action after the election to curb the federal deficit. He supports in principle a plan now being discussed within the administration and on Capitol Hill that would simultaneouly reduce the formula for cost-of-living adjustments (COLA) to social security and other government pension plans, while scaling back indexation of the tax system, scheduled to take effect next year. Feldstein proposed such a plan in a newspaper article in 1982.
Trimming the COLA provisions 3 percent would save $100 billion between fiscal years 1985 and '89, and scaling back indexation would save a similar amount over the same period, according to Congressional Budget Office figures. Such a plan ''provides complete protection'' from the risks of higher rates of inflation, Feldstein says.
He rejects the notion advanced by his critics that he might have been more effective in shaping policy within the administration if he had taken a lower profile.
''When the nation's chief economist reassures the public that everything is really OK (when it is not), it may not be a public service,'' he says.
He adds that while he may have disagreed with Treasury officials and White House aides, ''at no time did I either disagree with the position that the President had taken on the deficit publicly, nor did I advocate a position when the administration had not yet settled on one.''