George W. Bush won't only become the nation's chief executive on Jan. 20, he will also be signing on as steward of the economy. With the economy slowing, the new President's early moves will be crucial, and no one is more likely to influence Bush's thinking than chief economic adviser Lawrence B. Lindsey. A former professor at Harvard, Lindsey served in the White House under Bush's father and spent five years on the Federal Reserve Board working with Chairman Alan Greenspan. Senior Writer Rich Miller talked with Lindsey on Jan. 12. Note: This is an extended, online-only version of the interview that appears in the Jan. 29 edition of BusinessWeek.
Q: George W. Bush sure sounds worried about the economy. Do you see an imminent recession?
A: The economy is in some trouble. Whether we'll end up meeting the technical definition of recession or not, I don't know. But certainly it's fair to say that the majority of the businessmen [at Bush's recent economic forum in Austin] thought their industries were already in recession in the fourth quarter [of 2000]. I tend to think that's not characteristic of the economy as a whole, however.
Q: What's the plan for fighting a slump?
A: The first thing that has to happen is we have to enact the President's tax program. Probably, some acceleration is a good idea. The program was thought through to meet exactly the kinds of problems we're encountering now. Second, the Fed has recognized the problem and will be working along the same lines that we are. Third, I think we have a real regulatory problem, particularly in the energy sector. When he was a candidate, George Bush said explicitly what he proposed to do about it. That's reason to be optimistic.
Q: What about making tax cuts retroactive to Jan. 1?
A: It's a possibility. There's a lot of discussion on it. The President was very clear in the speech that introduced [the tax cut] that this program was also an insurance policy. It looks like we may have to activate the insurance option.
Q: President Bush has said that he wants to keep Social Security surpluses off-limits for current spending and tax cuts. But that would severely limit his options for stimulating the economy in the short run. With the economy slowing sharply, should the government temporarily dip into the Social Security surplus to give growth a boost?
A: It's a question that needs to be asked. The best thing to do to ensure the long-run health of the Social Security system is to have a vibrant economy.
Q: Your tax program is mostly on the individual side. What about business leaders' calls for corporate tax changes, such as faster write-offs of capital equipment and software?
A: The key here is to underpin the cash flow of the consumer. As long as final demand stays high, we think the business sector will be able to work through its financial problems. Many consumers are quite strapped right now.
Q: What about the IRA and 401(k) reforms that Congress nearly passed last year to boost savings?
A: I really think the President's program is the right program to enact.
Q: Which didn't have those measures in it.
Q: What can the new Administration do about energy shortages?
A: There are some deregulatory steps. Our problem is that during the '90s, the government simply didn't approve power plants, pipelines, transmission facilities. The energy infrastructure was neglected. We need more natural-gas pipelines, we need more power lines, and we need more power plants. Getting those things built and reducing the huge regulatory uncertainty that has built up in the last few years is essential. This is an 18-month to two-year program. But we've got to start now. [In California and elsewhere] we're already paying the price for the neglect of the last few years.
Q: Is there anything that can be done faster?
A: In the case of oil and natural gas, there are some foreign-policy issues. But certainly from a domestic energy point of view, we're at crisis level. We can't afford to sit back and let nature take its course any longer.
Q: Could the energy crisis in California push us into recession or severely disrupt the financial markets?
A: As long as sensible polices are pursued, the ramifications outside California will be slim. This is a California problem. It was created because of decisions made within California. I think the ramifications can be contained, as long as sensible policies are followed.
Q: Do you see a role for the federal government?
A: When you go down the list of what caused the problem and what the solutions are, you come back to problems that lie within the purview of the state of California.
Q: Hill Republicans say chances of Social Security privatization are fading. Do you agree?
A: The first priority on the economic front is a tax cut. But the Social Security plan solves one of the major underlying economic problems that have been allowed to get worse in the 1990s, which is our low savings rate. Reform will go a long way toward rebuilding it. So I don't think the plan really can wait all that long. Once the economy is moving forward, getting that saving rate back up so that we don't have as big a current-account imbalance, don't rely on the rest of the world for as much money, is absolutely essential. We also really have to take advantage of this window we have [in Social Security] where the cash flow in the program is positive. That also would suggest earlier rather than later action.
Q: Is Medicare reform a priority?
A: One of things that's a priority is the President's "immediate helping hand" program [of Medicare grants to states]. He wants to make sure that seniors who need help with prescription drugs get it right away.
Q: U.S. trading partners are suspicious that the Bush team may pursue a cheap-dollar policy. Your response?
A: That's absolutely false. America favors a strong dollar. We want the rest of the world to feel comfortable in investing in the U.S. We want to make sure that people realize that we're not going to depreciate our currency.
Q: Are you worried that Japan's economic troubles could drag down the world economy?
A: We wish the Japanese well. But ultimately it is the Japanese who are going to have to solve their problems, and not the U.S.
Q: There was a little spending orgy at the end of the last Congress...
A: ...A big spending orgy.
Q: Right, so what's your plan to see that it doesn't happen again?
A: I would watch very closely for the President's [new] budget. The role of Congress is to bring home goodies for constituents. The role of the President is to think of the nation, not just an indvidual state. Unfortunately, we have had until Jan. 20 a cheerleader for more spending. That's going to change.