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The intellectual leader of the young economists is Harvard's Feldstein, a soft-spoken family man from The Bronx, whose looks and middle-class background and mannerisms call to mind a benign dentist. While most of his peers remain academically cloistered, concentrating on the higher mathematics and econometric concepts of modern research, Feldstein is at home in both academe and Government. He is equally comfortable pondering a regression equation for a computer program or testifying to a congressional committee, which he often does. Both political parties eagerly seek his counsel. He was an adviser to Jimmy Carter's '76 campaign, turned down a bid to join Gerald Ford's Council of Economic Advisers, and is often spoken of as a future CEA chairman, probably in a Republican Administration.
Along with the other incentive economists, Feldstein argues that the Government is trying to do too many things that it either cannot do efficiently or that people can do better for themselves. That, of course, is a direct affront to Keynesian doctrine. Beginning in the mid-1930s, Establishment pillars of the dismal science have propagated Keynes' captivating notion that governments could tame beastly economies, making them stand up and jump through hoops. His prescription succeeded in lifting Western countries out of the 1930s Depression that had been triggered by an almost complete collapse in demand both in the U.S. and in Europe. Keynes' idea was simple enough: if people were so fearful of the future that they simply would not spend, government would have to prime the pump by doing much of the spending itself.
For almost 40 years the formula worked. Increased Government spending stimulated demand; companies hired more workers to meet the demand; then employees spent, bringing forth more demand and more production, and the virtuous cycle continued. But, says Economist Arthur Okun, long a Keynesian Counsellor to Democratic Presidents: "We were victims of our own success and a good press."
There were shortcomings and pitfalls, little recognized when Keynesianism was flourishing a decade and more ago. One shortcoming was the Keynesian assumption that supply would simply take care of itself once demand was stimulated. So long as inflation stayed low, that is in fact what happened. Even modest increases in consumer demand would bring quick jumps in output. So productive were U .S. plants and factories that they not only filled the needs of the nation's domestic market but also deluged the world with material abundance.
Between 1889 and 1970, the nation ran a trade deficit only once, in the midst of the Depression, in 1935. Yet since 1971, the combination of low productivity and high inflation has reduced both the supply and the competitiveness of U.S. products. Consequently, export growth has been sluggish, and foreign goods have poured into the U.S. at an ever increasing rate. Coupled with the nation's increasing dependence on foreign oil, this has meant that the U.S. has managed to eke out a trade surplus only twice since 1971, running up a cumulative deficit of $59 billion in those years.