Shultz Comes Full Cycle in Return to State Service : Economics: After serving in various posts in five presidential administrations, he is grappling with issues of old--retraining workers in a changing economy.

The industry was different, and so were the generation and the state.

But three decades ago in Chicago, long before he attained high and powerful Cabinet posts under two presidents, George P. Shultz, the labor economist and academic, was trying to solve a problem that is all too familiar today in California--how to retrain workers being displaced by changing times and markets.

Now, with California’s economy shifting and the defense industry shrinking, Shultz, 72, is completing a cycle by returning to state service, answering Gov. Pete Wilson’s call to chair a new Council of Economic Advisers.

Shultz has served in five federal administrations from Dwight D. Eisenhower’s to Ronald Reagan’s. After serving under Richard M. Nixon, Shultz moved to California, teaching at Stanford University and becoming president of the San Francisco-based Bechtel Co., the world’s largest engineering firm.

He is best known as President Reagan’s pragmatic secretary of state and is widely credited with managing Reagan’s shift away from his hostility toward the Soviet Union.

The irony is not lost: Under his watch, the Soviet Union began to unravel. Its demise allowed for deep cuts in defense spending, and now Shultz will try to help remedy the cuts’ effects on the California economy.

In 1981 and 1982, Shultz was one of Reagan’s top economic advisers. As chairman of the President’s economic advisory board, Shultz was among the chief architects of the Reagan policy of controlling government spending, tax cuts, limited government regulation, and deregulation of some industries, said Martin Anderson, Reagan’s first domestic policy adviser.

“This is rolling out the big gun,” said Anderson, who like Shultz and many other former Reagan Administration officials is a research fellow at the Hoover Institution on Stanford University’s campus.

“Back in Washington,” Anderson said, “George Bush is going to read about this, slap his forehead and say: ‘Gee, why didn’t I think of that?’ . . . Democrats are going to slap their foreheads and say, ‘Damn.’ ”

So far, Democrats are unsure what to make of the appointment. Some question whether one person’s advice can significantly help turn the economy around. Some suggest that the appointment is for show. Wilson’s proposed economic council remains ill-defined. The governor and Shultz are considering the board’s membership. It will have five to nine members and meet at least quarterly.

Shultz, the economist, is a strong advocate of free and open markets. Although he opposes most government regulation and taxes, he was in his younger days among the first economists to search for ways to retrain laid-off workers.

In the 1960s, when he was dean of the Graduate School of Business at the University of Chicago, Shultz was co-director of a commission funded by the meatpacking industry and unions that was responsible for retraining workers who had lost their jobs when the Midwest’s packinghouses closed.

Among those who worked with him were Arnold R. Weber, now president of Northwestern University, and Clark Kerr, former president of the University of California.

They found no magic bullets.

“The big truth was that making the transition is tougher than one might expect,” Kerr said. “You can give money to make them move to another area. But the readjustment is very difficult. When they get a new skill, they still have to find a new job, and they start at the bottom.”

Although Shultz advocates open competition, he also believes that the free market does not “automatically solve problems of employee displacement,” Weber said. This is a view with particular importance for California, which has lost more than 800,000 jobs in this recession. When Shultz became labor secretary under President Nixon, and Weber was his assistant, they set up programs to help retrain the jobless.

“You would treat an aerospace engineer differently than you would treat a foreleg-skinner,” Weber said. But, he noted, the problems of unemployed engineers and packinghouse workers “fall into the same general categories.”

“George knows all about the problems,” Weber said.

After serving as Nixon’s secretary of labor and director of the Office of Management and Budget, Shultz became Nixon’s treasury secretary. There, he ran afoul of Nixon, when he refused the President’s demand that he use the Internal Revenue Service to audit Nixon’s “enemies.”

Later, after Nixon resigned and tapes of Oval Office conversations were released, the President was heard to call Shultz a “candy ass.”

As Reagan’s secretary of state, Shultz again had cause to oppose the Administration, becoming a fierce opponent of dealing with Iranian terrorists. As a result, he was excluded from the Administration’s effort to trade arms to Iranians in exchange for the release of American hostages.

He was in the news in the closing weeks of last fall’s presidential campaign when notes surfaced showing that he and former Defense Secretary Caspar Weinberger had talked about President Bush’s involvement in the arms-for-hostage discussions.

Since stepping down as secretary of state, Shultz has settled at Stanford, where he has hosted and advised heads of state, past and present, from Israel to the former Soviet Union, and where he is finishing his memoirs.

At the end of the week, Shultz was in Little Rock, Ark., at the request of President-elect Bill Clinton and could not be reached. There, he was consulting with Warren Christopher, Clinton’s choice as secretary of state.

His decision to turn his attention back to state economic issues surprises some of his friends. But for all his globe-trotting, this New York-born, Princeton- and MIT-educated economist has acquired a taste for those only-in-California pleasures, such as flavoring his cocktails with the juice of oranges plucked from a tree in the back yard of his home behind the Stanford campus.

He lectures to graduate students at Stanford, and was instrumental in bringing Mikhail S. Gorbachev to “The Farm” in 1990 and 1992.

Shultz continues to be a member of Bechtel’s board of directors, but he will step down this year from the board of another San Francisco-based firm, Chevron Oil.

Shultz has been able to sample the finest that California offers. Through his membership in the Cypress Point Golf Club, he has access to Cypress Point golf course on the Monterey Peninsula.

A member of the Bohemian Club, San Francisco’s most famous private club, Shultz is among those who attend the annual gathering at Bohemian Grove, a sort of summer camp in the Northern California redwoods where captains of industry, high officials and heads of state play the part of raconteurs.

Looming over it all, though, is a state economy gone sour. The governor is hopeful that his Council of Economic Advisers can help find solutions. Shultz will take a longer look at what troubles California.

“He’s not a man who needs another line on his biography,” said Lee Grissom, an adviser to Wilson. “He has a deep commitment to the state of California. He wants to do whatever he can to assist it.”

Times staff writer Doyle McManus in Washington contributed to this story.

Profile: George Shultz

An economist by training, Shultz specialized early in his career in management negotiations with labor, and tried to find common ground in bitter strikes of the 1950s. As secretary of state under President Ronald Reagan, Shultz was a strong proponent of arms control negotiations with the Soviet Union and is credited with managing the shift away from hostility toward the Soviets.

Born: Dec. 13, 1920

Residence: Stanford, Calif.

Education: Undergraduate degree in economics from Princeton, doctorate in industrial economics from Massachusetts Institute of Technology.

Career highlights: Advised Presidents Eisenhower, Kennedy, Johnson, Nixon and Reagan in varying capacities. Nixon gave him his first Cabinet posts, naming him labor secretary and later director of the Office of Management and Budget and treasury secretary. He quit the Nixon Administration four months before Nixon resigned.