White House economic czar Lawrence B. Lindsey knows a thing or two about bust cycles. Three years ago, in a move that shocked fellow conservatives--but now seems like exquisite timing--he pulled out of the stock market and began warning that the bubble economy was about to blow.
So what does Mr. Bear think now that he's inside the White House looking out? On July 11, Lindsey talked with Washington Bureau Chief Lee Walczak and sounded more upbeat than he has in years--which is still well short of giddy.
Q: Since you've been warning about a financial imbalance for a while, I guess you weren't too startled when the slowdown hit.
A: I wasn't exactly surprised by it. And one other person who wasn't surprised was the President. He has lived through a business cycle like this in the Texas oil industry. When [George W. Bush] and I talked about this in 1998, we knew two things: One, the boom was going to end. And two, we didn't know when. So we designed the tax cut with the expectation that it would adjust to the business cycle.
Q: How do you see the economic situation now?
A: The consumer has held up well, and one reason is that there has been a substantial increase in long-term household income. Both monetary and fiscal policy have been very well-timed for this adjustment--which I think is still going on in the industrial and tech sectors. But there has not been a rebound in corporate profits, which is a precondition for recovery.
Q: Now that stocks are down and 401(k) accounts are in the red, aren't you concerned that support for your plan to partially privatize Social Security will ebb?
A: I think that a big reason for the popularity of personal accounts is diversification. Why should my entire Social Security retirement be subject to political risk? The shakeout will lead fewer people to take the "small company growth-stock option" for 100% of their 401(k).
Q: The slump seems to be drying up the federal surplus at a rapid clip. Are you worried?
A: Look, the Congressional Budget Office ran this model last year: $5.6 trillion baseline surplus, and suppose we had a 1990-style recession start right away. It knocked $140 billion off. In 1990, we had two quarters of negative [growth] numbers, deeper than anything we've experienced so far. Everyone's now gone from saying the money is endless to saying the money is ended.
Let's separate the facts from the political rhetoric: The fact is, the U.S. has an extremely healthy fiscal position. In spite of the slowdown, we are running the second-largest surplus in U.S. history.
Q: Unemployment is a lagging indicator, and companies are still announcing huge layoffs. Could you see us hitting, say, a 6% jobless rate?
A: No, I think it will come in below that.
Q: But what will happen if the rate keeps on climbing? Do you foresee stronger calls for action on the part of Congress?
A: The President has expressed his concern about the people being affected by the slowdown. We have programs in place to help them, like extended unemployment benefits. Those depend more on the duration of the slowdown than anything else. What we're hoping is to have Congress be more sensitive to the regional nature of the slowdown. The President, for example, has called for flexibility in the application of the increase in the minimum wage. Later on, we will be suggesting flexibility with regard to other programs. Why should the minimum wage in Matamoros, Mexico, be the same as in Manhattan? It makes absolutely no economic sense.
Q: If the economy doesn't improve, would you propose a second recovery package?
A: We have to see how things work out. Democrats in the Senate have made clear they don't want [a second tax cut]. Just the other day, Senator [Ernest F.] Hollings [D-S.C.] proposed taking back the 2001 tax cut.
Q: The question is, if the slump persists, should we expect Plan B from the White House?
A: The answer is yes. We're constantly looking for ways of improving the situation. The President has a series of initiatives that he'll be unveiling as conditions warrant.
Q: Are you upbeat about the future?
A: I'm optimistic that the economy will turn around next year and that we'll have a resumption of rapid growth. The analysis of the tax cut done by most Wall Street firms suggests it will add anywhere from 0.5 to 1 percentage point to growth.
Monetary policy has a 12-month to 18-month lag, so it will start to kick in during the first quarter. We will have already worked off a substantial portion of the inventory overhang in the industrial sector. The other factor we have in our favor is oil prices, which are moderating. So I'm very optimistic.
Q: Will we see a resumption of the feverish 5% growth of the boom era?
A: I don't think that was a sustainable pace. But long-run growth in the 3.5% range is quite probable. By Lee Walczak