Doctor's Prescriptions

Anybody who calls for hold-downs in Social Security benefits, Medicare, food stamps and other social programs would seem to be as charitable as Simon Legree. But even Keynesians tend to agree that Martin Feldstein is the standout economist of his generation, though they dissent strongly from some of his starboard views. By vote of his peers two years ago, he won the John Bates Clark Award, given biennially to the nation's most distinguished economist under 40. Earlier recipients include Nobel Laureates Milton Friedman, Paul Samuelson and Kenneth Arrow.

Feldstein is also the president of the National Bureau of Economic Research, a job once held by, among others, former Federal Reserve Chairman Arthur Burns. He splits his time between running that A-graded think tank and teaching graduate courses at Harvard. "My hobby is economics," says Feldstein. Any sports? "Last year I capsized a boat in New Hampshire." He does, however, enjoy traveling with Economist Wife Kathleen and their two daughters, 7 and 9.

Feldstein set out to become not an economist but a doctor. Before medical school, he went to Oxford on a 1961 Fulbright fellowship to study Britain's national health system; he figured that the U.S. would soon copy it, and he wanted to learn from the British mistakes. He caught the economics bug, as well as an acute case of Keynesianism, and stayed on to take a Ph.D.

He moved to Harvard and gradually drifted away from Keynes as he studied the impact of government spending programs on human behavior. In an interview with TIME Economics Correspondent George Taber, he capsuled his philosophy: "I do not begin from the ideological position that government activity is inherently bad because it limits individual freedom. Instead, I criticize government policies because they simply do not work or because they have such adverse side effects. Often the best reforms involve a smaller role for government, and less interference with the natural working of the private economy."

His studies have convinced Feldstein that the food-stamp program has compounded welfare dependency, that Medicare and Medicaid have led to unnecessary hospital stays and tests, thus aggravating the inflation of medical costs. His prescription is not to end these programs now that they exist but to curb their runaway costs and make them function more efficiently. Example: to prevent Medicare and Medicaid patients from blithely agreeing to undergo costly and wasteful tests by doctors, Feldstein argues that program recipients should have to pay at least a portion of their medical bills. That way, patients have the incentive to hold the costs down.

Much of Feldstein's research concentrates on tax policy and the problems of capital investment. He argues that the fast increase of Social Security benefits must be slowed because the system acts as an enormous vacuum cleaner, which sucks money out of the pockets of individual workers who would otherwise put at least some of it in the bank for retirement. Instead, the money goes directly to people who are already retired or to the disabled, and they immediately spend it. Thus almost none of these billions are saved by anyone, to be lent out by banks to build homes and factories and create jobs.

Equally provocative are Feldstein's ideas for tax reform. Inflation pushes almost everybody into higher tax brackets, and so people who get pay raises often wind up with less real income than before. To prevent this unfairness, Feldstein calls for "indexing" the tax rates so that an earner will not move up to a higher bracket unless his income jumps by more than the annual inflation rate.

Feldstein adds that indexing also should be applied to capital gains taxes, the levy on the increased value of property when it is sold. Says he: "Inflation distorts all aspects of personal income, but it is particularly harsh on the taxation of capital gains. Many individuals pay substantial capital gains taxes even though, when adjustment is made for inflation, they actually receive less from their sale than they had originally paid."

The common thread through all of Feldstein's recommendations is that the private marketplace is a far more efficient distributor of resources and regulator of prices than the government. Says he: "The younger economists are willing to admit the impotence of economic policy to solve many of the nation's problems. I was part of a generation of graduate students who looked to economic models to solve our problems and tell us what government policy should be. But the economy is constantly changing, and we are always running a little bit behind."

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