Feldstein on Taxes Sways Democrats More Than Fellow Republicans

In 1961, Martin Feldstein faced a choice: Become a doctor -- or an economist. He had finished his bachelor’s degree in economics from Harvard College and been accepted to Harvard Medical School. He went with economics, enticed by a Fulbright scholarship to study at Oxford University in England. Once there, he found a way to combine his two areas of interest, Bloomberg Markets magazine reports in its October special issue on the 50 Most Influential people in global finance. The first paper he published was an economic analysis of Britain’s National Health Service.

When he returned to the U.S. in 1967, the U.S. public health programs, Medicare and Medicaid, were just two years old. Feldstein says it was immediately clear to him that their costs would rise rapidly.

“Our present system of financing health care provides inadequate protection, encourages inefficient use of resources and accelerates the inflation of medical costs,” Feldstein wrote in an article in The Public Interest, a journal of conservative thought edited by Irving Kristol. While that’s a warning a politician might have offered in the halls of Congress this past summer as Democrats and Republicans jousted over the national debt and government spending, Feldstein wrote it in 1971, when Richard Nixon was in the White House.

Photographer: Nathaniel Welch/Bloomberg

Martin Feldstein, professor of economics at Harvard University, sits on the John Weeks Bridge in Cambridge, MA on July 26, 2011. Close

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Photographer: Nathaniel Welch/Bloomberg

Martin Feldstein, professor of economics at Harvard University, sits on the John Weeks Bridge in Cambridge, MA on July 26, 2011.

He was sounding the alarm decades before rising health-care outlays fully captured national attention. Health spending was 26.5 percent of the federal budget in 2010, up from 7.1 percent in 1970, Office of Management and Budget data show.

Deficit Fights

Feldstein has helped shape conservative economics by sticking to a few principles: shrink government spending, cut tax rates and be very wary of budget deficits. The first two were mostly embraced in the 1980s by Republican President Ronald Reagan, who Feldstein served for two years as chief economic adviser. The third, fighting deficits, proved to be more thorny, then as now.

Feldstein’s stance on balancing the budget got him on the cover of Time magazine in March 1984, although the words Monster Deficit took up more space than his picture. By July of that year, he was out of the White House, having clashed with Treasury Secretary Donald Regan, in particular.

While pointing out that tax legislation Reagan signed in 1986 ultimately reduced deficits, Feldstein says the issue was contentious. “There were people in the administration, on the political side, who just wished that subject would disappear, that I would stop talking about it, that somehow the public wouldn’t notice it,” Feldstein says.

‘People Listen’

The public, and every politician in Washington, has noticed the deficit this year. Feldstein, 71, is still talking about it.

“He’s got a vast amount of experience and knowledge across a whole array of different topics, from tax policy to health care to macroeconomics to China,” says Peter Orszag, Barack Obama’s former budget director, who was in the White House when Feldstein was on the Democratic president’s Economic Recovery Advisory Board. “People listen to what he says.”

“Marty Feldstein remains one of the influential thinkers on tax policy,” says David Malpass, former Bear Stearns Cos. chief economist. And Alan Simpson, retired Republican senator from Wyoming and co-chairman with Democrat Erskine Bowles of the president’s deficit-cutting commission, says Feldstein’s views on spending and taxes carry weight. “When he speaks, you want to listen,” he says.

Fed Candidate

Feldstein’s name circulated as a possible successor to Federal Reserve Chairman Alan Greenspan before President George W. Bush tapped Ben S. Bernanke in 2006. Feldstein says he talks regularly with monetary officials, including Bank of England Governor Mervyn King, New York Fed President William Dudley, Fed Vice Chairman Janet Yellen and Bernanke. “I am always interested in getting his perspective, even if we don’t always agree,” Dudley says in an e-mail.

The Simpson-Bowles panel, when it completed its work last December, recommended raising government revenue by eliminating or restricting so-called tax expenditures: deductions and credits written into the tax code for such things as mortgage interest and investments in renewable energy. Feldstein says reductions in tax expenditures were part of Reagan’s 1986 tax measure and should be included in any deficit fix today.

“There is literally more than a trillion dollars a year -- a year! -- of spending built into the tax code,” Feldstein said on Bloomberg Television on Aug. 2. “We could go after a large part of that.”

‘A Kind of Spending’

Feldstein, who wins praise for presenting economic concepts clearly, explains tax expenditures this way: “It sounds like a paradox. But if I buy a solar panel for my house, the government doesn’t send me a check. It gives me a tax deduction. But that’s the same thing as sending me a check. So that’s a kind of spending.”

Restricting tax expenditures could increase revenue without raising tax rates, Feldstein says. He has proposed that the benefit any taxpayer can get from deductions and exclusions be capped, perhaps at 2 percent of adjusted gross income.

In a twist, it’s Democrats who have been most open to the idea. Kent Conrad, the North Dakota Democrat who chairs the Senate Budget Committee, invoked Feldstein’s name in a floor speech on July 21 as he argued that the deficit can’t be tackled with spending cuts alone. “Martin Feldstein, who is one of the most conservative economists in the country, has said we have got to take on these tax expenditures,” he said.

Norquist Pledge

Republicans in Congress wouldn’t agree to higher tax revenue of any kind during the debt-ceiling negotiations. Anti- tax crusader Grover Norquist has the signatures of 236 representatives and 41 senators -- all but three of them Republicans -- on a pledge to oppose tax increases and reject any change in tax expenditures that would add to the total amount of money the government collects.

Orszag, who became a vice chairman at Citigroup Inc. after leaving the White House in 2010, says Feldstein’s economic views have been left behind by the GOP.

“He was in the mainstream of the Republican Party as it stood in the late 1970s,” says Orszag, who is also a columnist for Bloomberg View. “As the Republican Party has moved toward the Tea Party perspective, some of his views, at least from my perspective, are no longer consistent with that rightward shift.”

Feldstein plays down the differences between him and his party, although he says he backs up his ideas with numbers and will follow where the data lead. “I don’t have an agenda, and sometimes I annoy my Republican colleagues,” he says.

‘Core Republican’

Malpass, who in 2010 ran unsuccessfully for the Republican nomination for U.S. Senate in New York, says Feldstein’s economics are still the party’s. “Marty Feldstein is a core Republican, a growth-oriented Republican and an economic leader,” says Malpass, who now runs his own advisory firm, Encima Global, in New York.

The next test of whether Republicans will support a revenue increase such as Feldstein has proposed comes with the panel of 12 lawmakers created by the Aug. 2 debt-ceiling agreement. They’re charged with coming up with a deficit reduction package that Congress can approve by year’s end. If they don’t, $1.2 trillion in spending cuts kick in, while the tax code stays the same.

Republicans had to make clear in the debt-ceiling talks this summer that controlling spending is most important, Feldstein says. The time wasn’t right for the party to support limits on tax expenditures, he says. “That has to wait for the negotiations that are the second part of the recent deal -- if not longer.”

Recession Risk

In addition to being a deficit hawk, Feldstein is an expert on when recessions begin and end. For the better part of 30 years, he served as president of the National Bureau of Economic Research, the nonprofit group in Cambridge, Massachusetts, that establishes dates for the business cycle in the U.S.

In late August, Feldstein put the odds of a new recession at more than 50 percent. A sick housing market is at the root of the slow growth, he says. Feldstein argues that the government should help borrowers who owe more than their home is worth, backing loans that would reduce principal while ratcheting up the recourse a lender has when a borrower fails to pay.

“People are seeing their house values fall month after month,” he says. “If you stop that, if you reverse that, then people will think, ‘Ah, I can spend.’” If you don’t, the economy will be weak for years.

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

To contact the editors responsible for this story: Christopher Wellisz in Washington at cwellisz@bloomberg.net; Laura Colby at lcolby@bloomberg.net

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