Oct. 11 (Bloomberg) -- Harvard University economist Martin Feldstein may have the best credentials to succeed Alan Greenspan as Federal Reserve chairman. He may also have the biggest liabilities.

The 65-year-old Feldstein, a free-market Republican who served as President Ronald Reagan's top White House economist from 1982 to 1984, is one of a handful of economists Wall Street considers suitable to replace Greenspan, 79, whose term at the Fed expires Jan. 31.

``One of the five leading economists in America,'' says Barry Bosworth, a senior economist at the Brookings Institution who served as director of the Council on Wage and Price Stability during President Jimmy Carter's administration.

At the same time, Feldstein's prospects may be harmed by his association with American International Group Inc., a scandal- plagued insurance company where he has been a director for 17 years, as well as a reputation for not being politically astute.

``Marty has something of a tin ear for politics, and that would be a problem in the Fed chairman's job,'' says William Niskanen, who followed Feldstein as head of the President's Council of Economic Advisers in 1984 and is now chairman of the Cato Institute, a free-market research group in Washington.

Feldstein finished second only to Ben Bernanke, chairman of the White House Council of Economic Advisers, when 104 financial professionals were asked last month to name Greenspan's most likely successor. Bernanke got 38 percent of the vote and Feldstein 31 percent in the survey, which was conducted by Stone & McCarthy Research Associates, a Princeton, New Jersey, consulting company. No other candidate received more than 10 percent.

An Ideal Choice?

Economists say Feldstein's reputation for independence, probity and analytical thinking make him an ideal choice to head the central bank. For most of the last three decades, he has headed the National Bureau of Economic Research, the Cambridge, Massachusetts-based group that officially dates economic recessions and expansions, and he has earned a worldwide reputation as an expert on public finance.

A Feldstein appointment might not be so welcomed within the Republican Party. During the Reagan years, he angered supply-side economists by dismissing their claims that soaring budget deficits didn't matter. He publicly argued with then-Treasury Secretary Donald T. Regan, who said tax cuts would spur enough new economic growth to close the budget gap.

At one point, Feldstein even advocated a so-called ``stand-by tax'' -- anathema in an administration bent on tax-cutting --to help reduce the budget deficit if it got out of hand.

The AIG Impediment

The biggest impediment to his nomination may be his connection to New York-based AIG, the world's largest insurance company. AIG faces a securities fraud lawsuit from New York Attorney General Eliot Spitzer and is being investigated by federal authorities in a scandal that forced the ouster of its longtime chief executive, Maurice ``Hank'' Greenberg, and is likely to spawn years of shareholder litigation.

``I can't imagine that Feldstein is directly involved, but if there were any reasonable prospect of his being called to testify, with some presumption of culpability on the part of the board, that would be a problem,'' says Thomas Mann, a senior political analyst at Brookings Institution.

Feldstein also serves on the board of HCA Inc., the biggest U.S. hospital chain, which is involved in a Securities and Exchange Commission investigation into whether U.S. Senate Majority Leader Bill Frist received insider information before selling his stock in the company.

Economic Philosophy

Feldstein's views on monetary policy and interest rates are spelled out in a series of papers he wrote for NBER. In the most important, Feldstein said he agrees with Greenspan's ``risk- management'' approach of adjusting policy to counter risks to the economy. He's bent on keeping prices and wages from getting out of hand and opposes numerical inflation and growth targets, warning they could backfire and hurt the Fed's credibility.

``The Federal Reserve has now earned that credibility by its record over the past 20 years'' of delivering stable prices, he wrote in 2003. ``An inflation target might actually weaken the credibility of a central bank'' if it ``cannot or does not achieve the target value or range, especially if this failure to deliver persists for several years.''

At the same time, Feldstein criticized Greenspan's stewardship of the central bank during the early 1990s, saying the Fed didn't act aggressively enough to increase the supply of money when it became clear the economy was stagnating.

A Failure of Monetary Policy

``The poor performance of the American economy in 1991 and 1992 primarily reflected a failure of U.S. monetary policy,'' Feldstein said. ``Most analysts expected that the second quarter of 1991 would be the beginning of a healthy recovery. That it was not, I blame on the Federal Reserve.''

Feldstein hasn't said whether, if appointed, he'd continue Greenspan's habit of commenting on the federal budget, a practice that occasionally drew criticism from Greenspan-watchers who said he should have confined his opinions to interest rate policy.

Most of Feldstein's academic writings focused on fiscal policy rather than the money and credit policies that are the province of the Fed. In the early 1970s, he pioneered studies showing that changes in tax law provided incentives that altered the spending and saving patterns of individuals and corporations, and so had a large economic impact. He criticized the Social Security payroll tax for discouraging saving. He was among the first advocates of individual retirement accounts.

From Extreme to Mainstream

``At first, he was thought of as extreme, but later, with the advent of computers, he was able to run large databases and establish a very large empirical record,'' says Lawrence Lindsey, a Fed governor from 1991 to 1997 and a White House economic adviser during President George W. Bush's first term. ``I can't think of anyone who's had more impact on public finance in the second half of the 20th century.''

Lindsey describes Feldstein as a quiet, hard-driving man with a well-deserved reputation for integrity. He works long hours, frequently traveling to NBER conferences around the world. Greenspan attended the Julliard School of Music in New York, played the saxophone in a swing band and was a disciple of free- market philosopher Ayn Rand when he was young; Feldstein's off- hours are spent walking in the Vermont woods, where he owns a vacation home, and attending the Marlborough Music Festival nearby. He drives a 1992 Mercedes-Benz. He and his wife, Kate, also an economist, write a syndicated column together.

Feldstein forged early ties with the Bush camp. When then- Texas Governor Bush was running for president, Feldstein was part of the economic team that hammered out his plans for budget- and tax-cutting programs and influenced Bush's proposals for overhauling the Social Security system.

``He's certainly been very supportive of the president's fiscal policy and tax program,'' says Lindsey.

Collegial Approach

Lindsey says Feldstein, as Fed chairman, would run a ``collegial'' board of governors. ``He would want to have a high- level discussion,'' Lindsey says. At the same time, Lindsey says, Feldstein ``would be a tough guy to argue against'' because ``he's very capable'' and can defend his positions vigorously.

Feldstein's political skills may have sharpened since his Reagan White House days. At NBER, he took what had been a small, low-budget outpost for economists and transformed it into one that now plays ``a dominant role in research in the economics profession,'' Bosworth says.

Moreover, Greenspan himself wasn't always as politically savvy as he is now. During his term as President Gerald Ford's chief economic adviser in the mid-1970s, Greenspan sparked headlines around the world by telling a welfare-rights advocate that stockbrokers, not welfare mothers, had been hurt most by the 1973 recession.

NBER's Role

With links to virtually all U.S. academic institutions at home and abroad, NBER publishes most of the important working papers that economists write in the U.S. ``It has been by far the most significant institutional change within the profession,'' Bosworth says.

Over the years, Feldstein has encouraged graduate students who later would become some of the biggest names in public finance, among them former Treasury Secretary Lawrence H. Summers, now the president of Harvard, and University of Michigan tax policy expert Joel Slemrod.

``He's very knowledgeable about fiscal areas and has worldwide contacts,'' says Allan H. Meltzer, professor of political economy at Carnegie-Mellon University in Pittsburgh and author of a book on the history of the Fed.

To contact the reporter on this story: Art Pine through Kevin Miller in Washington at kmiller@bloomberg.net

Last Updated: October 10, 2005 18:03 EDT