Dr. Gloom vs. the Good-Time Guys

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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."