Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers.
Remembering Martin Feldstein
June 13, 2019 — Here in Cambridge, we are reeling from the passing of Martin Feldstein on Tuesday. He was tremendously influential both as scholar and teacher. He was also a major policy-maker: Below, the last section of this remembrance offers some recollections of his time as Chairman of Ronald Reagan’s Council of Economic Advisers.
In addition, remembrances at his funeral service today appropriately emphasized some qualities not known to those who knew of him only as a conservative economist: his generosity and humanity. He was greatly interested in other people, especially young people. A personal anecdote. Once, leaving a conference at Stockbridge, VT, I discovered that somebody else had taken my taxi, leaving me in danger of missing my plane from the airport in Lebanon, NH. Marty and his wife Kate dropped what they were doing and made the 75 mile roundtrip drive to get me to the airport on time.
Marty and the NBER
Martin Feldstein was also remarkable as a builder of institutions, particularly the National Bureau of Economic Research. When he took over the NBER in 1977, it was a small sleepy outfit in New York City that researched business cycle statistics. He transformed it utterly into the leading think-tank for economic research by far. Like the advent of Uber, the new NBER consisted of several innovations rolled into one.
Some observers wondered how a small think-tank in Cambridge, Massachusetts, could turn out thousands of important research papers. The most innovative of Marty’s ideas was the that its members would be leading scholars in applied fields who remained employees of their universities spread throughout the country, but who would simultaneously be members of the NBER. There they interacted with other leading scholars in their field, via working papers, grants, program meetings, and conferences.
One key to the success that Marty had with the NBER was the relentless emphasis on bringing in young scholars. I refer especially to the annual process for nominating and approving new untenured faculty. As a result of this visionary ever-greening, the Bureau has avoided the eventual aging problem of some other institutions and stayed at the frontier.
My experience working for Marty at the CEA
In 1983, Martin Feldstein asked me to work for him at the President’s Council of Economic Advisers. I hadn’t known him well before that, having gone to MIT rather than Harvard. But in the job interview, it turned out that a paper I was writing fit in perfectly with ideas he was developing, and he offered me the job on the spot. (The idea we shared is that even though the strong dollar of that period had an adverse effect on the US trade balance, this was just a symptom which could not be sensibly addressed without tackling the root problem, which was an excessive budget deficit. It was a straightforward application of the Mundell-Fleming model, together with an argument that if the fiscal expansion was taken as given, then it was better to spread its crowding-out effects across the traded and non-traded sectors of the economy than to concentrate the damage in the non-traded sector alone.)
I happily took the job as an opportunity to work with Professor Feldstein, who was soon to become “Marty” to me, as to so many others.
During this period, he was the first to popularize the notion of the twin deficits: that the newly swollen US trade deficit was the result of a large budget deficit. The analysis was an implicit rebuke to those who had foolishly predicted that the tax cuts enacted in 1981 would lead to smaller budget deficits and higher national saving, rather than the reverse. Others in the White House and the Treasury did not accept our forecast – made in the February 1984 Economic Report of the President — that the trade deficit would continue to rise, let alone our diagnosis as to why. It made front page headlines when Treasury Secretary Donald Regan responded to a question in congressional testimony by confirming that, so far as he was concerned, the ERP could be “thrown in the trash”.
Personally, I was pleased. But Feldstein was under enormous pressure, with regular press reports that he was about to be fired. The truth is that President Reagan never said a word to discourage him, either in public or private. (And he was not pushed out of office ahead of schedule, as the press thought.) But he was outnumbered by others in the Administration and it took a lot of bravery, conviction and principle to stand his ground. I learned a tremendous amount from him, including how to conduct oneself with integrity in Washington.
A year later, our numerical forecast for the 1984 trade deficit proved to have been right on target. Years later, Donald Trump and the Congress passed a large corporate tax cut in December 2017. Marty actually came out in support of that tax cut. But I felt confident in predicting that the US trade deficit would widen, not narrow as Trump had promised. After all, I had learned it from Marty.
This post written by Jeffrey Frankel.
What a well formulated encomium by Professor Frankel. And a gracious little personal anecdote included. What can say more about a person who will do an act of kindness for some other person without ever expecting to be publicly recognized for that act of kindness?? 75 miles is not a small trip to the neighborhood donut shop.
It has been said that coach Barry Switzer had a quote on his work desk which stated something similar to “It is amazing the great things which can be achieved, when no one in the group takes much concern over who gets the credit”. Maybe that is how Martin Feldstein ran both the NBER and the CEA
We have to do our very best to get the FULL and broad-view picture of any person, or endeavor to get that full view as best we can when we measure them. Professor Feldsten’s picture has much more benevolent sunshine falling down to the foreground of the painting than I had imagined.
Some extra comments could be made here related to Donald Regan. But they are not appropriate in this thread.
Gotta love this:
‘The idea we shared is that even though the strong dollar of that period had an adverse effect on the US trade balance, this was just a symptom which could not be sensibly addressed without tackling the root problem, which was an excessive budget deficit. It was a straightforward application of the Mundell-Fleming model’
But what use is Keynesian theory?
‘During this period, he was the first to popularize the notion of the twin deficits: that the newly swollen US trade deficit was the result of a large budget deficit. The analysis was an implicit rebuke to those who had foolishly predicted that the tax cuts enacted in 1981 would lead to smaller budget deficits and higher national saving, rather than the reverse. Others in the White House and the Treasury did not accept our forecast – made in the February 1984 Economic Report of the President — that the trade deficit would continue to rise, let alone our diagnosis as to why. It made front page headlines when Treasury Secretary Donald Regan responded to a question in congressional testimony by confirming that, so far as he was concerned, the ERP could be “thrown in the trash”.’
Wow – good economics that contradicts the White House line made it to the ERP? That would never happen had Hassett ran the CEA!
“A year later, our numerical forecast for the 1984 trade deficit proved to have been right on target. Years later, Donald Trump and the Congress passed a large corporate tax cut in December 2017. Marty actually came out in support of that tax cut. But I felt confident in predicting that the US trade deficit would widen, not narrow as Trump had promised. After all, I had learned it from Marty.”
History repeats itself!
What you failed to mention that he was a director of the AIG when it failed. The great professor was either unaware of the failure of AIG or was complicit in it. Also, he claimed the BHO stimulus plan would not work. It created 3.50 Million jobs. It is amazing a that failure like Feldstein is celebrated. We are truly living in 1984.
Like Maurice Greenberg the CEO did want one member of the Board of Directors told him to do? Such smear campaigns are a bit absurd.
what are you trying to say? that the great Prof was a stooge for Greenberg?
That you overstate what a single member of the Board of Director controls. No – you are a stooge for the Bernie Bros.
A most brilliant economist! Mr Feldstein, will be sorely missed at the NBER,
in light of his numerous contributions.
His “Twin Deficits” theory provoked a great deal of discussion regarding
government debt spending and a negative trade account balance.
http://www.igmchicago.org/surveys/deficits
RIP, Mr Feldstein: we are poorer without you.
A large budget deficit, which is fuel for economic growth, causes a large trade deficit because a growing economy draws in goods from foreign economies that are growing more slowly. Further, there is less need for domestic producers to export their goods for the same reason. The dollar strengthens because the U.S. economy has stronger growth and therefore there is more demand for dollars.
As Keynes pointed out, an increase of savings results from an increase of incomes, not from a decrease of taxes. Likewise, an increase of demand causes an increase of investment. Crowding out caused by budget deficits is false because interest rates are very low.
Feldstein was mainly concerned with cutting Social Security benefits and other safety net aspects of the New Deal.
“Crowding out caused by budget deficits is false because interest rates are very low.”
Oh Lord – everyone knows that real interest rates jumped from 2% to 6% during the early 1980’s. Everyone except you it seems.
‘THROW AWAY’ FELDSTEIN’S REPORT, REGAN TELLS SENATE BUDGET PANEL By PETER T. KILBORN and SPECIAL TO THE NEW YORK TIMESFEB. 4, 1984
https://www.nytimes.com/1984/02/04/business/throw-away-feldstein-s-report-regan-tells-senate-budget-panel.html
‘The dispute within the Reagan Administration over budget deficits erupted before Congress today when an infuriated Treasury Secretary Donald T. Regan told senators that they could ”throw away” Martin S. Feldstein’s Economic Report of the President. Mr. Regan was testifying this morning before the Senate Budget Committee on the President’s budget proposal for the 1985 fiscal year when the ranking Democrat on the committee, Lawton Chiles of Florida, cited passages on budget deficits appearing in the Economic Report, which was sent to Congress on Thursday.’
Ah how a partisan driven Treasury Secretary tries to dismiss the honest analysis from the CEA! How did Feldstein reject?
“Then, in the afternoon, Mr. Feldstein took the same seat at the felt-covered hearing room table. Senator Pete V. Domenici, Republican of New Mexico and chairman of the committee, read Mr. Regan’s remark to Mr. Feldstein and asked what he thought of it. ”I suppose,” said the council’s chairman, apparently unperturbed, ”it was just a throwaway line.” It was the only moment during the two-part hearing that the full committee, Democrats and Republicans, broke into laughter.”
I’m glad Jeff put a link to the ERP 1984 as I could not locate it otherwise via Google. Of course Don Regan wanted it throw in the trash can! Two paragraphs from page 54 are telling:
“In the 1950s and 1960s central banks were committed to maintaining their countries’ exchange rates at fixed levels. This effort became increasingly difficult over time, due particularly to divergent inflation rates among countries. By 1971 the dollar had become unsustainably overvalued in the sense that the supply of dollars greatly exceeded the private demand for dollars. Central banks made up the difference, buying unwanted dollars in exchange for foreign currencies. The effort was abandoned in 1973 and the major currencies moved onto a system of floating, i.e., market-determined, exchange rates. When exchange rates float, there is no such thing as undervaluation or overvaluation, in the sense of excess market supply or demand for currencies. The value of the currency is whatever the market dictates that it should be.
The Floating Exchange Rate System
It is nearly impossible to imagine the world economy going through the past 10 years in the straightjacket of fixed exchange rates. Given the events of this period, notably the large changes in oil prices and the divergent macroeconomic policies among the industrialized countries, floating exchange rates have performed well.”
No such thing as undervaluation or overvaluation under market determined exchange rates. I can see Team Trump screaming “fake news”. And the indictment of fixed exchange rate in the 2nd paragraph here is spot on even if Judy Shelton and Art Laffer cannot understand the sound logic of this ERP!
pgl: All ERPs are on St. Louis Fed website, here.