For months, the White House insisted that an ever-growing white-collar crime wave would not hurt the economy or cause President George W. Bush political problems. But when WorldCom Inc. admitted that it had improperly accounted for nearly $4 billion in expenses, Bush wasted no time. He lashed out at Corporate America's ethical lapses four times in four days and scheduled a major speech for July 9 on Wall Street.
As he helps the President prepare for the address, Chief Economic Adviser Lawrence B. Lindsey spoke to BusinessWeek Senior Writer Rich Miller.
Q: Corporate accounting scandals are clearly spooking investors. Could they cause a plunge back into recession?
A: I don't believe there will be a double-dip. The consumer remains strong. Government spending remains strong. Investment is likely to pick up later this year or early next year and is unlikely to decline. If I put it all together, this year the economy will probably grow a bit over 3%.
Q: [But] could the swooning market make people feel less wealthy and slow consumer spending?
A: Most of the economic effects happened in the '90s, when these excesses were occurring. And as a result, people made the wrong investment decisions. We had a $5 trillion decline in the stock market by the second quarter of 2001, [shortly after] we came into office. That was offset very well by the [Bush] tax cut that was enacted. I think the wealth hit is behind us.
Q: What should be done to improve corporate governance?
A: The 10-point plan the President laid out in March forms the basis of what needs to be done. It called for legislation, which is now happening, and stricter enforcement of the law. We've had a dramatically stepped-up level of enforcement. We've had the first-ever settlement with [Edison Schools Inc., which] adhered to the technicalities of [generally accepted accounting principles] but still didn't give an accurate picture of what was going on. There have also been a record number of corporate officials disbarred from ever holding responsible office again.
Q: Where do you stand on the accounting-reform bill of Senate Banking Chairman Paul Sarbanes [D-Md.]? He wants an independent industry-oversight board.
A: The President called for changes in accounting practices four months ago. And last week, the SEC put out its proposal for an accounting-standards board. My concern with the Sarbanes proposal is that it creates overlapping jurisdictions. His proposed board would also be responsible for securities law. Basically, we'd have two SECs. I've been in Washington long enough to know that when you have overlapping jurisdictions between bureaucracies, things either fall through the cracks or you get turf wars. We think the bill the House passed is more likely to successfully enforce the law.
Q: The President once said the corporate scandals were confined to a few "bad apples." Given the breadth of the problems, do you still feel that way?
A: I think only a few people really broke the law here. But the '90s clearly were a period of financial excess. So there's a lot of cleaning up to do. Unfortunately, it usually is on the downside of a cycle that we end up catching the people who abuse the process when things were on the rise.
Q: The Democrats charge that the Republicans' deregulatory zeal created a climate that encouraged those abuses. What's your response?
A: I don't think it's appropriate to assess blame. But I would make the factual observation that they were in charge [of the White House] in the period in question.
Q: Democrats say SEC Chairman Harvey Pitt is too close to the accounting firms, his former law-firm clients, to get the job done. Should he resign?
A: That's ridiculous. He's doing a fine job. We have a record number of prosecutions going.
Q: Individual investors seem spooked by all the abuses. What will Bush say to reassure them?
A: I'm not going to scoop the President. We approached the problem very seriously and thought through the kind of mechanism that would provide tough, consistent enforcement. That's what's needed.